Is Nan Nan Resources Enterprise (HKG:1229) A Risky Investment?

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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Nan Nan Resources Enterprise Limited (HKG:1229) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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.

View our latest analysis for Nan Nan Resources Enterprise

What Is Nan Nan Resources Enterprise’s Net Debt?

The image below, which you can click on for greater detail, shows that Nan Nan Resources Enterprise had debt of HK$208.1m at the end of March 2024, a reduction from HK$302.8m over a year. However, it also had HK$189.3m in cash, and so its net debt is HK$18.8m.

How Strong Is Nan Nan Resources Enterprise’s Balance Sheet?

The latest balance sheet data shows that Nan Nan Resources Enterprise had liabilities of HK$76.5m due within a year, and liabilities of HK$276.7m falling due after that. Offsetting these obligations, it had cash of HK$189.3m as well as receivables valued at HK$8.23m due within 12 months. So its liabilities total HK$155.7m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company’s HK$143.9m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There’s no doubt that we learn most about debt from the balance sheet. But it is Nan Nan Resources Enterprise’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.

Over 12 months, Nan Nan Resources Enterprise made a loss at the EBIT level, and saw its revenue drop to HK$116m, which is a fall of 52%. To be frank that doesn’t bode well.

Caveat Emptor

While Nan Nan Resources Enterprise’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 a very considerable HK$16m at the EBIT level. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$5.4m in negative free cash flow over the last year. That means it’s on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 3 warning signs for Nan Nan Resources Enterprise you should be aware of.

If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com