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.' 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. As with many other companies Technical Publications Service S.p.A. (BIT:TPS) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Technical Publications Service's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Technical Publications Service had debt of €2.51m, up from €1.32m in one year. However, it does have €9.92m in cash offsetting this, leading to net cash of €7.41m.
A Look At Technical Publications Service's Liabilities
According to the last reported balance sheet, Technical Publications Service had liabilities of €8.42m due within 12 months, and liabilities of €3.02m due beyond 12 months. Offsetting this, it had €9.92m in cash and €13.5m in receivables that were due within 12 months. So it actually has €12.0m more liquid assets than total liabilities.
This luscious liquidity implies that Technical Publications Service's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Technical Publications Service boasts net cash, so it's fair to say it does not have a heavy debt load!
Technical Publications Service's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Technical Publications Service'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Technical Publications Service 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. Looking at the most recent three years, Technical Publications Service recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to investigate a company's debt, in this case Technical Publications Service has €7.4m in net cash and a decent-looking balance sheet. So we don't think Technical Publications Service's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Technical Publications Service's earnings per share history for free.
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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