Does Sincere Watch (Hong Kong) (HKG:444) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sincere Watch (Hong Kong) Limited (HKG:444) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sincere Watch (Hong Kong)

What Is Sincere Watch (Hong Kong)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Sincere Watch (Hong Kong) had debt of HK$308.2m, up from HK$253.2m in one year. However, because it has a cash reserve of HK$75.5m, its net debt is less, at about HK$232.8m.

How Strong Is Sincere Watch (Hong Kong)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sincere Watch (Hong Kong) had liabilities of HK$209.4m due within 12 months and liabilities of HK$330.8m due beyond that. Offsetting these obligations, it had cash of HK$75.5m as well as receivables valued at HK$57.8m due within 12 months. So it has liabilities totalling HK$406.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$145.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sincere Watch (Hong Kong) would likely require a major re-capitalisation if it had to pay its creditors today. 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 Sincere Watch (Hong Kong) 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.

Over 12 months, Sincere Watch (Hong Kong) reported revenue of HK$143m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Sincere Watch (Hong Kong) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$167m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized HK$24m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Sincere Watch (Hong Kong) (including 1 which is concerning) .

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.