Does Teleperformance SE's (EPA:TEP) Debt Level Pose A Problem?
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Teleperformance SE (EPA:TEP), a large-cap worth €9.8b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Teleperformance’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TEP here.
Check out our latest analysis for Teleperformance
Does TEP Produce Much Cash Relative To Its Debt?
TEP's debt levels surged from €1.6b to €2.4b over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at €336m to keep the business going. On top of this, TEP has generated cash from operations of €523m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, signalling that TEP’s current level of operating cash is high enough to cover debt.
Can TEP meet its short-term obligations with the cash in hand?
With current liabilities at €1.1b, it appears that the company has been able to meet these obligations given the level of current assets of €1.8b, with a current ratio of 1.59x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does TEP face the risk of succumbing to its debt-load?
Teleperformance is a highly levered company given that total debt exceeds equity. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether TEP is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In TEP's case, the ratio of 10.27x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as TEP is a safe investment.
Next Steps:
At its current level of cash flow coverage, TEP has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how TEP has been performing in the past. I suggest you continue to research Teleperformance to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TEP’s future growth? Take a look at our free research report of analyst consensus for TEP’s outlook.
Valuation: What is TEP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TEP is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
