These 4 Measures Indicate That Blue Star (NSE:BLUESTARCO) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Blue Star Limited (NSE:BLUESTARCO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Blue Star

What Is Blue Star's Net Debt?

The image below, which you can click on for greater detail, shows that Blue Star had debt of ₹3.49b at the end of September 2024, a reduction from ₹8.70b over a year. However, it does have ₹4.36b in cash offsetting this, leading to net cash of ₹876.8m.

How Healthy Is Blue Star's Balance Sheet?

We can see from the most recent balance sheet that Blue Star had liabilities of ₹35.6b falling due within a year, and liabilities of ₹1.75b due beyond that. On the other hand, it had cash of ₹4.36b and ₹13.8b worth of receivables due within a year. So its liabilities total ₹19.1b more than the combination of its cash and short-term receivables.

Since publicly traded Blue Star shares are worth a total of ₹404.3b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

On top of that, Blue Star grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Blue Star can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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 ₹876.8m. And it impressed us with its EBIT growth of 35% over the last year. So we are not troubled with Blue Star's debt use. 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. Case in point: We've spotted 1 warning sign for Blue Star you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.