Time Watch Investments (HKG:2033) 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.' 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, Time Watch Investments Limited (HKG:2033) does carry debt. But is this debt a concern to shareholders?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Time Watch Investments

What Is Time Watch Investments's Net Debt?

As you can see below, at the end of December 2021, Time Watch Investments had HK$15.6m of debt, up from HK$7.75m a year ago. Click the image for more detail. But it also has HK$1.05b in cash to offset that, meaning it has HK$1.03b net cash.

A Look At Time Watch Investments' Liabilities

According to the last reported balance sheet, Time Watch Investments had liabilities of HK$288.7m due within 12 months, and liabilities of HK$82.1m due beyond 12 months. Offsetting this, it had HK$1.05b in cash and HK$303.6m in receivables that were due within 12 months. So it actually has HK$982.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Time Watch Investments' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Time Watch Investments boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Time Watch Investments's saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Time Watch Investments 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. Over the last three years, Time Watch Investments actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Time Watch Investments has net cash of HK$1.03b, as well as more liquid assets than liabilities. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in HK$99m. So is Time Watch Investments's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Time Watch Investments , and understanding them should be part of your investment process.

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.