Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Synchronoss Technologies, Inc. (NASDAQ:SNCR) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Synchronoss Technologies’s Debt?

As you can see below, Synchronoss Technologies had US$10.0m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$29.8m in cash to offset that, meaning it has US$19.8m net cash.

A Look At Synchronoss Technologies’ Liabilities

The latest balance sheet data shows that Synchronoss Technologies had liabilities of US$127.0m due within a year, and liabilities of US$55.8m falling due after that. Offsetting this, it had US$29.8m in cash and US$46.2m in receivables that were due within 12 months. So it has liabilities totalling US$106.7m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Synchronoss Technologies has a market capitalization of US$270.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Synchronoss Technologies also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Synchronoss Technologies’s ability to maintain a healthy balance sheet going forward.

In the last year Synchronoss Technologies had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to US$280m. That’s not what we would hope to see.

So How Risky Is Synchronoss Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Synchronoss Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$566k of cash and made a loss of US$59m. Given it only has net cash of US$19.8m, the company may need to raise more capital if it doesn’t reach break-even soon. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start.