Telecom Plus (LON:TEP) Has A Rock Solid Balance Sheet

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. Importantly, Telecom Plus Plc (LON:TEP) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Telecom Plus

How Much Debt Does Telecom Plus Carry?

You can click the graphic below for the historical numbers, but it shows that Telecom Plus had UK£89.7m of debt in March 2023, down from UK£99.2m, one year before. But on the other hand it also has UK£193.8m in cash, leading to a UK£104.1m net cash position.

How Strong Is Telecom Plus' Balance Sheet?

According to the last reported balance sheet, Telecom Plus had liabilities of UK£472.8m due within 12 months, and liabilities of UK£91.3m due beyond 12 months. Offsetting this, it had UK£193.8m in cash and UK£329.5m in receivables that were due within 12 months. So its liabilities total UK£40.7m more than the combination of its cash and short-term receivables.

Since publicly traded Telecom Plus shares are worth a total of UK£1.33b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Telecom Plus boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Telecom Plus grew its EBIT by 64% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Telecom Plus's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Telecom Plus 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, Telecom Plus actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Telecom Plus has UK£104.1m in net cash. The cherry on top was that in converted 163% of that EBIT to free cash flow, bringing in UK£225m. So we don't think Telecom Plus's use of debt 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Telecom Plus you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.