TeamLease Services (NSE:TEAMLEASE) Seems To Use Debt Quite Sensibly

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. As with many other companies TeamLease Services Limited (NSE:TEAMLEASE) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TeamLease Services

What Is TeamLease Services's Debt?

As you can see below, TeamLease Services had ₹622.9m of debt at September 2020, down from ₹974.1m a year prior. But it also has ₹3.34b in cash to offset that, meaning it has ₹2.72b net cash.

How Healthy Is TeamLease Services' Balance Sheet?

We can see from the most recent balance sheet that TeamLease Services had liabilities of ₹5.72b falling due within a year, and liabilities of ₹1.05b due beyond that. Offsetting this, it had ₹3.34b in cash and ₹2.55b in receivables that were due within 12 months. So its liabilities total ₹881.7m more than the combination of its cash and short-term receivables.

Having regard to TeamLease Services' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹57.8b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

It is just as well that TeamLease Services's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, TeamLease Services's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 don't have any problem with TeamLease Services's use of debt. 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 4 warning signs for TeamLease Services you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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