These 4 Measures Indicate That TeamLease Services (NSE:TEAMLEASE) Is Using Debt Safely

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 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 note that TeamLease Services Limited (NSE:TEAMLEASE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 TeamLease Services had ₹404.0m of debt in September 2021, down from ₹910.6m, one year before. But it also has ₹4.51b in cash to offset that, meaning it has ₹4.11b net cash.

How Strong Is TeamLease Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TeamLease Services had liabilities of ₹6.92b due within 12 months and liabilities of ₹1.35b due beyond that. Offsetting this, it had ₹4.51b in cash and ₹4.61b in receivables that were due within 12 months. So it can boast ₹848.0m 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 it's very unlikely that the ₹70.8b company is short on cash, but still worth keeping an eye on the 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 49% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. Over the last three years, TeamLease Services actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case TeamLease Services has ₹4.11b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.6b, being 195% of its EBIT. So is TeamLease Services's debt a risk? It doesn't seem so to us. 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. Be aware that TeamLease Services is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.