Is Suzhou Chunxing Precision Mechanical (SZSE:002547) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Suzhou Chunxing Precision Mechanical Co., Ltd. (SZSE:002547) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Suzhou Chunxing Precision Mechanical

What Is Suzhou Chunxing Precision Mechanical's Net Debt?

As you can see below, Suzhou Chunxing Precision Mechanical had CN¥1.36b of debt at September 2023, down from CN¥1.75b a year prior. However, because it has a cash reserve of CN¥729.5m, its net debt is less, at about CN¥629.4m.

How Strong Is Suzhou Chunxing Precision Mechanical's Balance Sheet?

The latest balance sheet data shows that Suzhou Chunxing Precision Mechanical had liabilities of CN¥3.41b due within a year, and liabilities of CN¥1.15b falling due after that. On the other hand, it had cash of CN¥729.5m and CN¥930.0m worth of receivables due within a year. So it has liabilities totalling CN¥2.90b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥4.66b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Suzhou Chunxing Precision Mechanical will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Suzhou Chunxing Precision Mechanical wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to CN¥2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Suzhou Chunxing Precision Mechanical produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥208m. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Suzhou Chunxing Precision Mechanical .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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