Is TP Group (LON:TPG) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that TP Group plc (LON:TPG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TP Group

What Is TP Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 TP Group had UK£7.00m of debt, an increase on none, over one year. But it also has UK£7.37m in cash to offset that, meaning it has UK£372.0k net cash.

A Look At TP Group's Liabilities

We can see from the most recent balance sheet that TP Group had liabilities of UK£19.9m falling due within a year, and liabilities of UK£14.3m due beyond that. On the other hand, it had cash of UK£7.37m and UK£19.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£6.95m.

Since publicly traded TP Group shares are worth a total of UK£35.8m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, TP Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TP Group 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.

In the last year TP Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is TP Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months TP Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through UK£1.9m of cash and made a loss of UK£5.0m. But at least it has UK£372.0k on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for TP Group (of which 1 is significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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