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. As with many other companies Suzhou Victory Precision Manufacture Co., Ltd. (SZSE:002426) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

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. However, it does have CN¥452.4m in cash offsetting this, leading to net debt of about CN¥1.47b.

A Look At Suzhou Victory Precision Manufacture's Liabilities

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. On the other hand, it had cash of CN¥452.4m and CN¥1.34b worth of receivables due within a year. So its liabilities total CN¥2.24b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Suzhou Victory Precision Manufacture is worth CN¥5.82b, 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 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 13%, to CN¥3.5b. We would much prefer see growth.

Caveat Emptor

Not only did Suzhou Victory Precision Manufacture's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). 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 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.