Is Huili Resources (Group) (HKG:1303) A Risky Investment?

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.' 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 Huili Resources (Group) Limited (HKG:1303) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Huili Resources (Group)'s Debt?

The chart below, which you can click on for greater detail, shows that Huili Resources (Group) had CN¥128.5m in debt in June 2025; about the same as the year before. But it also has CN¥896.9m in cash to offset that, meaning it has CN¥768.5m net cash.

A Look At Huili Resources (Group)'s Liabilities

The latest balance sheet data shows that Huili Resources (Group) had liabilities of CN¥1.12b due within a year, and liabilities of CN¥156.6m falling due after that. Offsetting this, it had CN¥896.9m in cash and CN¥475.2m in receivables that were due within 12 months. So it can boast CN¥96.3m more liquid assets than total liabilities.

This surplus suggests that Huili Resources (Group) is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Huili Resources (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Huili Resources (Group)

The modesty of its debt load may become crucial for Huili Resources (Group) if management cannot prevent a repeat of the 69% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Huili Resources (Group) 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Huili Resources (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Huili Resources (Group) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huili Resources (Group) has net cash of CN¥768.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥573m, being 110% of its EBIT. So we don't think Huili Resources (Group)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Huili Resources (Group) that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.