Does Suzhou Victory Precision Manufacture (SZSE:002426) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Suzhou Victory Precision Manufacture Co., Ltd. (SZSE:002426) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 Victory Precision Manufacture

How Much Debt Does Suzhou Victory Precision Manufacture Carry?

The chart below, which you can click on for greater detail, shows that Suzhou Victory Precision Manufacture had CN¥1.92b in debt in March 2024; about the same as the year before. On the flip side, it has CN¥452.4m in cash leading to net debt of about CN¥1.47b.

How Strong Is Suzhou Victory Precision Manufacture's Balance Sheet?

We can see from the most recent balance sheet that Suzhou Victory Precision Manufacture had liabilities of CN¥3.79b falling due within a year, and liabilities of CN¥242.0m due beyond that. Offsetting these obligations, it had cash of CN¥452.4m as well as receivables valued at CN¥1.34b due within 12 months. So it has liabilities totalling CN¥2.24b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Suzhou Victory Precision Manufacture is worth CN¥5.26b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Suzhou Victory Precision Manufacture's earnings that will influence how the balance sheet holds up in the future. 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 Victory Precision Manufacture had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥3.5b. That's not what we would hope to see.

Caveat Emptor

While Suzhou Victory Precision Manufacture's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥391m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥807m into a profit. So to be blunt we do think it is risky. For riskier companies like Suzhou Victory Precision Manufacture I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.