Yahoo Finance TP Group (LON:TPG) Has A Pretty Healthy Balance Sheet
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that TP Group plc (LON:TPG) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for TP Group
What Is TP Group's Net Debt?
As you can see below, at the end of December 2018, TP Group had UK£5.94m of debt, up from UK£1.02m a year ago. Click the image for more detail. But on the other hand it also has UK£22.4m in cash, leading to a UK£16.5m net cash position.
How Strong Is TP Group's Balance Sheet?
According to the last reported balance sheet, TP Group had liabilities of UK£16.2m due within 12 months, and liabilities of UK£7.35m due beyond 12 months. On the other hand, it had cash of UK£22.4m and UK£8.90m worth of receivables due within a year. So it can boast UK£7.78m more liquid assets than total liabilities.
This short term liquidity is a sign that TP Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that TP Group has more cash than debt is arguably a good indication that it can manage its debt safely.
We also note that TP Group improved its EBIT from a last year's loss to a positive UK£245k. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TP Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TP Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, TP Group actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that TP Group has net cash of UK£16m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of UK£4.8m, being 1949% of its EBIT. So we don't have any problem with TP Group's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in TP Group, you may well want to click here to check an interactive graph of its earnings per share history.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
