Longfor Group Holdings (HKG:960) Has A Somewhat Strained Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Longfor Group Holdings Limited (HKG:960) does carry debt. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Longfor Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Longfor Group Holdings had CN¥170.0b of debt in June 2025, down from CN¥203.5b, one year before. On the flip side, it has CN¥42.6b in cash leading to net debt of about CN¥127.4b.

How Healthy Is Longfor Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Longfor Group Holdings had liabilities of CN¥208.9b due within 12 months and liabilities of CN¥178.3b due beyond that. On the other hand, it had cash of CN¥42.6b and CN¥102.1b worth of receivables due within a year. So it has liabilities totalling CN¥242.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥64.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Longfor Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Longfor Group Holdings

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

As it happens Longfor Group Holdings has a fairly concerning net debt to EBITDA ratio of 11.9 but very strong interest coverage of 19.2. So either it has access to very cheap long term debt or that interest expense is going to grow! Importantly, Longfor Group Holdings's EBIT fell a jaw-dropping 37% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Longfor Group Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Longfor Group Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

To be frank both Longfor Group Holdings's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Overall, it seems to us that Longfor Group Holdings's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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 example - Longfor Group Holdings has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.