Here's Why TPXimpact Holdings (LON:TPX) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that TPXimpact Holdings plc (LON:TPX) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TPXimpact Holdings

What Is TPXimpact Holdings's Net Debt?

As you can see below, at the end of September 2022, TPXimpact Holdings had UK£20.3m of debt, up from UK£13.1m a year ago. Click the image for more detail. On the flip side, it has UK£6.20m in cash leading to net debt of about UK£14.1m.

How Healthy Is TPXimpact Holdings' Balance Sheet?

According to the last reported balance sheet, TPXimpact Holdings had liabilities of UK£14.5m due within 12 months, and liabilities of UK£27.9m due beyond 12 months. On the other hand, it had cash of UK£6.20m and UK£17.0m worth of receivables due within a year. So its liabilities total UK£19.2m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because TPXimpact Holdings is worth UK£38.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TPXimpact Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year TPXimpact Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to UK£83m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate TPXimpact Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost UK£2.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£124k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For instance, we've identified 4 warning signs for TPXimpact Holdings (1 is potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.