We Think Suzhou Victory Precision Manufacture (SZSE:002426) Has A Fair Chunk Of Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Suzhou Victory Precision Manufacture Co., Ltd. (SZSE:002426) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Suzhou Victory Precision Manufacture

How Much Debt Does Suzhou Victory Precision Manufacture Carry?

The image below, which you can click on for greater detail, shows that Suzhou Victory Precision Manufacture had debt of CN¥1.87b at the end of June 2024, a reduction from CN¥1.96b over a year. However, it does have CN¥383.0m in cash offsetting this, leading to net debt of about CN¥1.49b.

How Healthy 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¥3.69b falling due within a year, and liabilities of CN¥245.5m due beyond that. On the other hand, it had cash of CN¥383.0m and CN¥1.34b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.22b.

This deficit isn't so bad because Suzhou Victory Precision Manufacture is worth CN¥6.23b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Suzhou Victory Precision Manufacture's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Suzhou Victory Precision Manufacture had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to CN¥3.7b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Suzhou Victory Precision Manufacture produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥374m at the EBIT level. 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¥814m. So we do think this stock is quite risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Suzhou Victory Precision Manufacture's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.