Time Watch Investments (HKG:2033) has a rock-solid balance sheet

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Time Watch Investments Limited (HKG:2033) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Time Watch Investments

What is Time Watch Investments’ net debt?

As you can see below, at the end of December 2021, Time Watch Investments had a debt of HK$15.6 million, compared to HK$7.75 million a year ago. Click on the image for more details. But he also has HK$1.05 billion in cash to offset that, meaning he has a net cash position of HK$1.03 billion.

SEHK: 2033 Debt to Equity History June 6, 2022

A look at the liabilities of Time Watch Investments

According to the latest published balance sheet, Time Watch Investments had liabilities of HK$288.7 million due within 12 months and liabilities of HK$82.1 million due beyond 12 months. In return, he had HK$1.05 billion in cash and HK$303.6 million in debt due within 12 months. So he actually has HK$982.4 million After liquid assets than total liabilities.

This excess liquidity is an excellent indication that Time Watch Investments’ balance sheet is almost as strong as Fort Knox’s. Given this fact, we think its balance sheet is as strong as an ox. In short, Time Watch Investments has clean cash, so it’s fair to say that it doesn’t have a lot of leverage!

In fact, Time Watch Investments’ saving grace is its low level of leverage, as its EBIT has fallen 40% in the last twelve months. When a company sees its profit reservoir, it can sometimes see its relationship with its lenders turn sour. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Time Watch Investments will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. Although Time Watch Investments has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s growing. builds (or erodes) cash balance. Over the past three years, Time Watch Investments has actually produced more free cash flow than EBIT. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

While we sympathize with investors who find debt a concern, you should bear in mind that Time Watch Investments has net cash of HK$1.03 billion, as well as more liquid assets than liabilities. . The icing on the cake was converting 114% of that EBIT into free cash flow, bringing in HK$99 million. So is Time Watch Investments’ debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 1 warning sign with Time Watch Investments, and understanding them should be part of your investment process.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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