Threat Protect Australia Limited (ASX:TPS): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like Threat Protect Australia Limited (ASX:TPS), with a market cap of AU$23.45M. However, an important fact which most ignore is: how financially healthy is the business? Since TPS is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into TPS here.

Does TPS generate an acceptable amount of cash through operations?

TPS’s debt levels surged from AU$2.80M to AU$7.31M over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$1.16M for investing into the business. Additionally, TPS has produced AU$1.30M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17.79%, meaning that TPS’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In TPS’s case, it is able to generate 0.18x cash from its debt capital.

Does TPS’s liquid assets cover its short-term commitments?

Looking at TPS’s most recent AU$7.77M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.72x, which is below the prudent industry ratio of 3x.

ASX:TPS Historical Debt Mar 20th 18
ASX:TPS Historical Debt Mar 20th 18

Is TPS’s debt level acceptable?

TPS is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since TPS is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

TPS’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure TPS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Threat Protect Australia to get a more holistic view of the stock by looking at: