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 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 can see that Suzhou Victory Precision Manufacture Co., Ltd. (SZSE:002426) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Suzhou Victory Precision Manufacture
What Is Suzhou Victory Precision Manufacture's Debt?
You can click the graphic below for the historical numbers, but it shows that Suzhou Victory Precision Manufacture had CN¥1.99b of debt in September 2023, down from CN¥2.36b, one year before. On the flip side, it has CN¥242.4m in cash leading to net debt of about CN¥1.75b.
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¥3.62b falling due within a year, and liabilities of CN¥268.3m due beyond that. Offsetting this, it had CN¥242.4m in cash and CN¥2.07b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.58b.
Suzhou Victory Precision Manufacture has a market capitalization of CN¥6.06b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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 Victory Precision Manufacture 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 Victory Precision Manufacture had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥3.4b. That makes us nervous, to say the least.
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. Indeed, it lost CN¥207m 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. 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¥444m 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.
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.