Stocks with market capitalization between $2B and $10B, such as TPG Telecom Limited (ASX:TPM) with a size of AU$4.80b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at TPM’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TPM here. View out our latest analysis for TPG Telecom
How does TPM’s operating cash flow stack up against its debt?
TPM has built up its total debt levels in the last twelve months, from AU$1.33b to AU$1.46b , which is made up of current and long term debt. With this increase in debt, TPM currently has AU$79.80m remaining in cash and short-term investments for investing into the business. Additionally, TPM has generated AU$668.20m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 45.88%, meaning that TPM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TPM’s case, it is able to generate 0.46x cash from its debt capital.
Can TPM meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$875.70m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of AU$234.70m, with a current ratio of 0.27x below the prudent level of 3x.
Can TPM service its debt comfortably?
TPM is a relatively highly levered company with a debt-to-equity of 56.13%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether TPM is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TPM’s, case, the ratio of 25.26x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
TPM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure TPM has company-specific issues impacting its capital structure decisions. I suggest you continue to research TPG Telecom to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TPM’s future growth? Take a look at our free research report of analyst consensus for TPM’s outlook.
- Valuation: What is TPM 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 TPM is currently mispriced by the market.
- 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.