Is Atlassian Corporation Plc (NASDAQ:TEAM) A Financially Sound Company?
There are a number of reasons that attract investors towards large-cap companies such as Atlassian Corporation Plc (NASDAQ:TEAM), with a market cap of US$20b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Atlassian’s financial liquidity and leverage to give you an idea of Atlassian’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into TEAM here.
See our latest analysis for Atlassian
How does TEAM’s operating cash flow stack up against its debt?
In the previous 12 months, TEAM’s rose by about US$828m accounting for long term debt. With this growth in debt, TEAM’s cash and short-term investments stands at US$1.8b for investing into the business. Additionally, TEAM has generated US$331m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 40%, meaning that TEAM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In TEAM’s case, it is able to generate 0.4x cash from its debt capital.
Does TEAM’s liquid assets cover its short-term commitments?
Looking at TEAM’s US$450m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$1.9b, with a current ratio of 4.17x. However, many consider a ratio above 3x to be high.
Can TEAM service its debt comfortably?
Since equity is smaller than total debt levels, Atlassian is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. However, since TEAM is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
TEAM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for TEAM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Atlassian to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for TEAM’s future growth? Take a look at our free research report of analyst consensus for TEAM’s outlook.
Valuation: What is TEAM 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 TEAM 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
