Is Timeless Software (HKG:8028) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Timeless Software Limited (HKG:8028) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Timeless Software

How Much Debt Does Timeless Software Carry?

You can click the graphic below for the historical numbers, but it shows that Timeless Software had HK$15.0m of debt in September 2020, down from HK$15.9m, one year before. However, it does have HK$54.1m in cash offsetting this, leading to net cash of HK$39.1m.

A Look At Timeless Software's Liabilities

The latest balance sheet data shows that Timeless Software had liabilities of HK$83.4m due within a year, and liabilities of HK$11.1m falling due after that. On the other hand, it had cash of HK$54.1m and HK$27.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$12.8m.

Of course, Timeless Software has a market capitalization of HK$92.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Timeless Software 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 you can't view debt in total isolation; since Timeless Software 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 Timeless Software had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to HK$112m. We would much prefer see growth.

So How Risky Is Timeless Software?

While Timeless Software lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$31m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 3 warning signs for Timeless Software (1 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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