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Is Atlassian Corporation Plc's (NASDAQ:TEAM) Balance Sheet A Threat To Its Future?

Simply Wall St

Atlassian Corporation Plc (NASDAQ:TEAM), a large-cap worth US$31b, comes to mind for investors seeking a strong and reliable stock investment. 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. However, the key to extending previous success is in the health of the company’s financials. This article will examine Atlassian’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TEAM here.

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Check out our latest analysis for Atlassian

Does TEAM Produce Much Cash Relative To Its Debt?

In the previous 12 months, TEAM's rose by about US$847m accounting for long term debt. With this growth in debt, TEAM currently has US$1.8b remaining in cash and short-term investments to keep the business going. On top of this, TEAM has generated cash from operations of US$431m in the last twelve months, leading to an operating cash to total debt ratio of 51%, indicating that TEAM’s operating cash is sufficient to cover its debt.

Does TEAM’s liquid assets cover its short-term commitments?

With current liabilities at US$564m, it appears that the company has been able to meet these commitments with a current assets level of US$1.9b, leading to a 3.34x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered high by some.

NasdaqGS:TEAM Historical Debt, May 24th 2019

Is TEAM’s debt level acceptable?

Since equity is smaller than total debt levels, Atlassian is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. But since TEAM is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:

Although TEAM’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how TEAM has been performing in the past. You should continue to research Atlassian to get a more holistic view of the large-cap by looking at:

  1. 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.
  2. 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.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.