We Think Time Watch Investments (HKG:2033) Can Manage Its Debt With Ease

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. As with many other companies Time Watch Investments Limited (HKG:2033) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Time Watch Investments

What Is Time Watch Investments's Net Debt?

As you can see below, at the end of June 2021, Time Watch Investments had HK$47.8m of debt, up from HK$7.75m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$1.07b in cash, so it actually has HK$1.02b net cash.

How Strong Is Time Watch Investments' Balance Sheet?

The latest balance sheet data shows that Time Watch Investments had liabilities of HK$328.8m due within a year, and liabilities of HK$115.2m falling due after that. Offsetting this, it had HK$1.07b in cash and HK$332.3m in receivables that were due within 12 months. So it actually has HK$959.0m more liquid assets than total liabilities.

This luscious liquidity implies that Time Watch Investments' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Time Watch Investments has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Time Watch Investments grew its EBIT by 66% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 most recent three years, Time Watch Investments recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$1.02b, as well as more liquid assets than liabilities. And we liked the look of last year's 66% year-on-year EBIT growth. At the end of the day we're not concerned about Time Watch Investments's debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Time Watch Investments , and understanding them should be part of your investment process.

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.

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.

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