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You Might Like Topps Tiles Plc (LON:TPT) But Do You Like Its Debt?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Topps Tiles Plc (LON:TPT), with a market cap of UK£147m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into TPT here.

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TPT’s Debt (And Cash Flows)

TPT's debt levels have fallen from UK£35m to UK£30m over the last 12 months – this includes long-term debt. With this reduction in debt, TPT currently has UK£14m remaining in cash and short-term investments , ready to be used for running the business. Moreover, TPT has generated UK£22m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 73%, indicating that TPT’s current level of operating cash is high enough to cover debt.

Does TPT’s liquid assets cover its short-term commitments?

Looking at TPT’s UK£43m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£53m, leading to a 1.23x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:TPT Historical Debt, May 22nd 2019

Does TPT face the risk of succumbing to its debt-load?

Since total debt levels exceed equity, TPT is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TPT's case, the ratio of 13.36x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TPT ample headroom to grow its debt facilities.

Next Steps:

TPT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how TPT has been performing in the past. I suggest you continue to research Topps Tiles to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TPT’s future growth? Take a look at our free research report of analyst consensus for TPT’s outlook.
  2. Valuation: What is TPT 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 TPT is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.