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.’ 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. Importantly, TeamLease Services Limited (NSE:TEAMLEASE) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is TeamLease Services’s Debt?
As you can see below, at the end of March 2019, TeamLease Services had ₹164.1m of debt, up from ₹72.9m a year ago. Click the image for more detail. But on the other hand it also has ₹805.9m in cash, leading to a ₹641.9m net cash position.
How Strong Is TeamLease Services’s Balance Sheet?
We can see from the most recent balance sheet that TeamLease Services had liabilities of ₹4.84b falling due within a year, and liabilities of ₹660.6m due beyond that. Offsetting this, it had ₹805.9m in cash and ₹3.53b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.17b.
Of course, TeamLease Services has a market capitalization of ₹42.9b, so these liabilities are probably manageable. 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.
Also positive, TeamLease Services grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if TeamLease Services can strengthen its balance sheet over time. 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. 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. Looking at the most recent three years, TeamLease Services recorded free cash flow of 37% 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 look at a company’s total liabilities, it is very reassuring that TeamLease Services has ₹642m in net cash. And it impressed us with its EBIT growth of 27% over the last year. So is TeamLease Services’s debt a risk? It doesn’t seem so to us. 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 TeamLease Services’s earnings per share history for free.
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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