Is BLS International Services (NSE:BLS) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, BLS International Services Limited (NSE:BLS) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BLS International Services

What Is BLS International Services's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 BLS International Services had debt of ₹217.5m, up from ₹68.6m in one year. However, its balance sheet shows it holds ₹6.30b in cash, so it actually has ₹6.09b net cash.

How Strong Is BLS International Services' Balance Sheet?

According to the last reported balance sheet, BLS International Services had liabilities of ₹1.60b due within 12 months, and liabilities of ₹181.1m due beyond 12 months. On the other hand, it had cash of ₹6.30b and ₹456.3m worth of receivables due within a year. So it can boast ₹4.98b more liquid assets than total liabilities.

This surplus suggests that BLS International Services has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BLS International Services has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, BLS International Services grew its EBIT by 61% 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 it is BLS International Services's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While BLS International Services has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, BLS International Services recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that BLS International Services has net cash of ₹6.09b, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₹2.2b. So we don't think BLS International Services's use of debt is risky. We'd be very excited to see if BLS International Services insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.