Is Hilong Holding (HKG:1623) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Hilong Holding Limited (HKG:1623) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Hilong Holding Carry?

The image below, which you can click on for greater detail, shows that Hilong Holding had debt of CN¥2.48b at the end of June 2025, a reduction from CN¥2.89b over a year. However, it does have CN¥740.2m in cash offsetting this, leading to net debt of about CN¥1.74b.

How Strong Is Hilong Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hilong Holding had liabilities of CN¥4.53b due within 12 months and liabilities of CN¥106.2m due beyond that. Offsetting this, it had CN¥740.2m in cash and CN¥2.72b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.18b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥311.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hilong Holding would probably need a major re-capitalization if its creditors were to demand repayment. 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 Hilong Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Hilong Holding

In the last year Hilong Holding had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥4.5b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hilong Holding produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥62m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥342m in the last year. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hilong Holding has 2 warning signs we think you should be aware of.

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.