Does Blue Star (NSE:BLUESTARCO) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Blue Star Limited (NSE:BLUESTARCO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Blue Star

What Is Blue Star's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Blue Star had ₹1.67b of debt in March 2024, down from ₹5.78b, one year before. However, its balance sheet shows it holds ₹6.23b in cash, so it actually has ₹4.56b net cash.

How Strong Is Blue Star's Balance Sheet?

We can see from the most recent balance sheet that Blue Star had liabilities of ₹38.8b falling due within a year, and liabilities of ₹1.26b due beyond that. On the other hand, it had cash of ₹6.23b and ₹27.6b worth of receivables due within a year. So its liabilities total ₹6.28b more than the combination of its cash and short-term receivables.

Having regard to Blue Star's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹336.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Blue Star also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Blue Star has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Blue Star's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Blue Star may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Blue Star saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Blue Star's liabilities, but we can be reassured by the fact it has has net cash of ₹4.56b. And it impressed us with its EBIT growth of 41% over the last year. So we are not troubled with Blue Star's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Blue Star (1 shouldn't be ignored) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com