Does Team Group (TPE:4967) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Team Group Inc. (TPE:4967) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Team Group

What Is Team Group's Debt?

As you can see below, at the end of September 2020, Team Group had NT$1.38b of debt, up from NT$406.7m a year ago. Click the image for more detail. On the flip side, it has NT$235.7m in cash leading to net debt of about NT$1.14b.

A Look At Team Group's Liabilities

We can see from the most recent balance sheet that Team Group had liabilities of NT$1.60b falling due within a year, and liabilities of NT$370.8m due beyond that. Offsetting these obligations, it had cash of NT$235.7m as well as receivables valued at NT$723.0m due within 12 months. So it has liabilities totalling NT$1.02b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Team Group has a market capitalization of NT$3.95b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Team Group has a sky high EBITDA ratio of 6.6, implying high debt, but a strong interest coverage of 11.4. So either it has access to very cheap long term debt or that interest expense is going to grow! Notably, Team Group's EBIT launched higher than Elon Musk, gaining a whopping 293% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Team Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Team Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Team Group's conversion of EBIT to free cash flow was a real negative on this analysis, as was its net debt to EBITDA. But its EBIT growth rate was significantly redeeming. Looking at all this data makes us feel a little cautious about Team Group's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Team Group you should be aware of, and 2 of them don't sit too well with us.

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. 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.
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