We Think Timeless Software (HKG:8028) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Timeless Software Limited (HKG:8028) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Timeless Software

How Much Debt Does Timeless Software Carry?

The chart below, which you can click on for greater detail, shows that Timeless Software had HK$15.0m in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds HK$159.5m in cash, so it actually has HK$144.5m net cash.

A Look At Timeless Software's Liabilities

According to the last reported balance sheet, Timeless Software had liabilities of HK$33.6m due within 12 months, and liabilities of HK$8.54m due beyond 12 months. Offsetting this, it had HK$159.5m in cash and HK$9.08m in receivables that were due within 12 months. So it actually has HK$126.5m more liquid assets than total liabilities.

This surplus strongly suggests that Timeless Software has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Timeless Software has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Timeless Software turned things around in the last 12 months, delivering and EBIT of HK$75m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Timeless Software may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Timeless Software actually produced more free cash flow than EBIT over the last year. 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, the bottom line is that Timeless Software has net cash of HK$144.5m and plenty of liquid assets. The cherry on top was that in converted 181% of that EBIT to free cash flow, bringing in HK$136m. So we don't think Timeless Software's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Timeless Software (of which 1 doesn't sit too well with us!) you should know about.

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. 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.