What does Threat Protect Australia Limited’s (ASX:TPS) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as Threat Protect Australia Limited (ASX:TPS) with its market cap of AU$20.10m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that TPS is not presently profitable, it’s vital to evaluate 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’d encourage you to dig deeper yourself into TPS here.

Does TPS produce enough cash relative to debt?

TPS’s debt levels surged from AU$2.80m to AU$7.31m over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, TPS’s cash and short-term investments stands at AU$1.16m , ready to deploy into the business. On top of this, TPS has produced cash from operations of AU$1.30m over the same time period, leading to an operating cash to total debt ratio of 17.79%, signalling that TPS’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. 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?

With current liabilities at AU$7.77m, it seems that the business is not able to meet these obligations given the level of current assets of AU$5.57m, with a current ratio of 0.72x below the prudent level of 3x.

ASX:TPS Historical Debt June 25th 18
ASX:TPS Historical Debt June 25th 18

Is TPS’s debt level acceptable?

Since total debt levels have outpaced equities, TPS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since TPS is presently loss-making, there’s a question of sustainability of its current operations. 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:

With a high level of debt on its balance sheet, TPS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TPS to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for TPS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Threat Protect Australia to get a better picture of the stock by looking at:

  1. Valuation: What is TPS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TPS is currently mispriced by the market.
  2. Historical Performance: What has TPS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.