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. As with many other companies Suzhou Victory Precision Manufacture Co., Ltd. (SZSE:002426) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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.

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

The latest balance sheet data shows that Suzhou Victory Precision Manufacture had liabilities of CN¥3.79b due within a year, and liabilities of CN¥242.0m falling due after that. Offsetting these obligations, it had cash of CN¥452.4m as well as receivables valued at CN¥1.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.55b.

This deficit isn't so bad because Suzhou Victory Precision Manufacture is worth CN¥5.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 13%, to CN¥3.5b. That's not what we would hope to see.

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). Indeed, it lost CN¥265m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥807m. So we do think this stock is quite 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.