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

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. As with many other companies Time Watch Investments Limited (HKG:2033) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its 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$15.6m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds HK$1.17b in cash, so it actually has HK$1.15b net cash.

How Healthy Is Time Watch Investments' Balance Sheet?

The latest balance sheet data shows that Time Watch Investments had liabilities of HK$154.7m due within a year, and liabilities of HK$70.0m falling due after that. Offsetting this, it had HK$1.17b in cash and HK$160.8m in receivables that were due within 12 months. So it actually has HK$1.11b more liquid assets than total liabilities.

This surplus liquidity suggests that Time Watch Investments' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Time Watch Investments boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Time Watch Investments 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.

In the last year Time Watch Investments had a loss before interest and tax, and actually shrunk its revenue by 10%, to HK$881m. We would much prefer see growth.

So How Risky Is Time Watch Investments?

Although Time Watch Investments had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$34m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Time Watch Investments you should be aware of, and 1 of them is significant.

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.