Is Nan Nan Resources Enterprise (HKG:1229) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Nan Nan Resources Enterprise Limited (HKG:1229) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Nan Nan Resources Enterprise's Net Debt?

As you can see below, at the end of September 2025, Nan Nan Resources Enterprise had HK$253.6m of debt, up from HK$232.8m a year ago. Click the image for more detail. But it also has HK$282.3m in cash to offset that, meaning it has HK$28.8m net cash.

A Look At Nan Nan Resources Enterprise's Liabilities

According to the last reported balance sheet, Nan Nan Resources Enterprise had liabilities of HK$370.5m due within 12 months, and liabilities of HK$89.6m due beyond 12 months. Offsetting these obligations, it had cash of HK$282.3m as well as receivables valued at HK$6.68m due within 12 months. So it has liabilities totalling HK$171.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$176.0m, so it does suggest shareholders should keep an eye on Nan Nan Resources Enterprise's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Nan Nan Resources Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Nan Nan Resources Enterprise

Fortunately, Nan Nan Resources Enterprise grew its EBIT by 7.1% in the last year, making that debt load look even more manageable. 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 Nan Nan Resources Enterprise 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nan Nan Resources Enterprise has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Nan Nan Resources Enterprise recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Nan Nan Resources Enterprise's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$28.8m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in HK$60m. So we are not troubled with Nan Nan Resources Enterprise's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Nan Nan Resources Enterprise .

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.