Is Time Watch Investments (HKG:2033) Using Debt Sensibly?

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 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. We can see that Time Watch Investments Limited (HKG:2033) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Time Watch Investments

What Is Time Watch Investments's Debt?

The chart below, which you can click on for greater detail, shows that Time Watch Investments had HK$15.7m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds HK$1.18b in cash, so it actually has HK$1.16b net cash.

A Look At Time Watch Investments' Liabilities

According to the last reported balance sheet, Time Watch Investments had liabilities of HK$155.2m due within 12 months, and liabilities of HK$76.8m due beyond 12 months. Offsetting this, it had HK$1.18b in cash and HK$205.9m in receivables that were due within 12 months. So it actually has HK$1.15b more liquid assets than total liabilities.

This luscious liquidity implies that Time Watch Investments' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Time Watch Investments boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Time Watch Investments's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Time Watch Investments had a loss before interest and tax, and actually shrunk its revenue by 30%, to HK$982m. To be frank that doesn't bode well.

So How Risky Is Time Watch Investments?

While Time Watch Investments lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$37m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. 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. Case in point: We've spotted 2 warning signs for Time Watch Investments you should be aware of, and 1 of them makes us a bit uncomfortable.

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.