Is TeamLease Services (NSE:TEAMLEASE) A Risky Investment?

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.' 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 note that TeamLease Services Limited (NSE:TEAMLEASE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TeamLease Services

What Is TeamLease Services's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 TeamLease Services had ₹622.9m of debt, an increase on ₹440.2m, over one year. However, its balance sheet shows it holds ₹3.34b in cash, so it actually has ₹2.72b net cash.

A Look At TeamLease Services's Liabilities

Zooming in on the latest balance sheet data, we can see that TeamLease Services had liabilities of ₹5.72b due within 12 months and liabilities of ₹1.05b due beyond that. On the other hand, it had cash of ₹3.34b and ₹2.55b worth of receivables due within a year. So its liabilities total ₹881.7m more than the combination of its cash and short-term receivables.

Given TeamLease Services has a market capitalization of ₹43.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, TeamLease Services also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for TeamLease Services if management cannot prevent a repeat of the 22% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 TeamLease Services 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. TeamLease Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, TeamLease Services's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that TeamLease Services has ₹2.72b in net cash. So we are not troubled with TeamLease Services's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for TeamLease Services that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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. 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.
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