We Think TPXimpact Holdings (LON:TPX) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TPXimpact Holdings

What Is TPXimpact Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 TPXimpact Holdings had UK£24.3m of debt, an increase on UK£18.0m, over one year. However, because it has a cash reserve of UK£6.77m, its net debt is less, at about UK£17.5m.

A Look At TPXimpact Holdings' Liabilities

We can see from the most recent balance sheet that TPXimpact Holdings had liabilities of UK£16.8m falling due within a year, and liabilities of UK£31.6m due beyond that. On the other hand, it had cash of UK£6.77m and UK£21.1m worth of receivables due within a year. So it has liabilities totalling UK£20.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of UK£30.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TPXimpact Holdings can strengthen its balance sheet over time. 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 5.0%, to UK£84m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, TPXimpact Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£19m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£2.4m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that TPXimpact Holdings is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.