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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies TeamLease Services Limited (NSE:TEAMLEASE) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for TeamLease Services

What Is TeamLease Services's Debt?

As you can see below, at the end of March 2022, TeamLease Services had ₹276.7m of debt, up from ₹138.0k a year ago. Click the image for more detail. But it also has ₹3.43b in cash to offset that, meaning it has ₹3.16b net cash.

A Look At TeamLease Services' Liabilities

According to the last reported balance sheet, TeamLease Services had liabilities of ₹6.92b due within 12 months, and liabilities of ₹1.43b due beyond 12 months. Offsetting this, it had ₹3.43b in cash and ₹5.41b in receivables that were due within 12 months. So it actually has ₹494.2m more liquid assets than total liabilities.

Having regard to TeamLease Services' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹55.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that TeamLease Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, TeamLease Services grew its EBIT by 56% 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 TeamLease Services'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While TeamLease Services 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, TeamLease Services 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 we empathize with investors who find debt concerning, you should keep in mind that TeamLease Services has net cash of ₹3.16b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -₹195m, being 114% of its EBIT. So is TeamLease Services's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 3 warning signs for TeamLease Services you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.