Lonking Holdings (HKG:3339) Has A Rock Solid Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Lonking Holdings Limited (HKG:3339) does carry debt. But is this debt a concern to shareholders?

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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. 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, 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.

How Much Debt Does Lonking Holdings Carry?

As you can see below, at the end of June 2025, Lonking Holdings had CN¥20.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.53b in cash, so it actually has CN¥6.51b net cash.

How Strong Is Lonking Holdings' Balance Sheet?

We can see from the most recent balance sheet that Lonking Holdings had liabilities of CN¥5.61b falling due within a year, and liabilities of CN¥86.8m due beyond that. Offsetting this, it had CN¥6.53b in cash and CN¥3.45b in receivables that were due within 12 months. So it can boast CN¥4.28b more liquid assets than total liabilities.

This surplus liquidity suggests that Lonking Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Lonking Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Lonking Holdings

And we also note warmly that Lonking Holdings grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lonking Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lonking Holdings 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. Happily for any shareholders, Lonking Holdings 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 Lonking Holdings has net cash of CN¥6.51b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.6b, being 201% of its EBIT. The bottom line is that we do not find Lonking Holdings's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Lonking Holdings .

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.