TeamLease Services (NSE:TEAMLEASE) Has A Pretty Healthy Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TeamLease Services Limited (NSE:TEAMLEASE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TeamLease Services

What Is TeamLease Services's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 TeamLease Services had debt of ₹228.1m, up from ₹165.4m in one year. But it also has ₹3.45b in cash to offset that, meaning it has ₹3.22b net cash.

How Strong Is TeamLease Services' Balance Sheet?

The latest balance sheet data shows that TeamLease Services had liabilities of ₹8.09b due within a year, and liabilities of ₹1.95b falling due after that. Offsetting this, it had ₹3.45b in cash and ₹6.31b in receivables that were due within 12 months. So it has liabilities totalling ₹278.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that TeamLease Services' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹45.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, TeamLease Services boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that TeamLease Services has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Happily for any shareholders, TeamLease Services actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about TeamLease Services's liabilities, but we can be reassured by the fact it has has net cash of ₹3.22b. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in ₹415m. So we are not troubled with TeamLease Services's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with TeamLease Services .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.