Does Teleperformance (EPA:TEP) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Teleperformance SE (EPA:TEP) makes use of debt. But should shareholders be worried about its use of debt? 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Teleperformance's Net Debt? As you can see below, Teleperformance had €4.16b of debt at December 2024, down from €4.61b a year prior. However, it does have €1.06b in cash offsetting this, leading to net debt of about €3.10b. ENXTPA:TEP Debt to Equity History March 28th 2025 A Look At Teleperformance's Liabilities According to the last reported balance sheet, Teleperformance had liabilities of €3.36b due within 12 months, and liabilities of €4.16b due beyond 12 months. Offsetting these obligations, it had cash of €1.06b as well as receivables valued at €2.50b due within 12 months. So it has liabilities totalling €3.96b more than its cash and near-term receivables, combined. This is a mountain of leverage relative to its market capitalization of €5.82b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. View our latest analysis for Teleperformance 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. Teleperformance has net debt worth 2.0 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 4.8 times the interest expense. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. If Teleperformance can keep growing EBIT at last year's rate of 10% over the last year, then it will find its debt load easier to manage. 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 Teleperformance 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Teleperformance actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert. Our View On our analysis Teleperformance's conversion of EBIT to free cash flow should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. For instance it seems like it has to struggle a bit to handle its total liabilities. When we consider all the elements mentioned above, it seems to us that Teleperformance is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Teleperformance is showing 1 warning sign in our investment analysis , you should know about... At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.