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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that BLS International Services Limited (NSE:BLS) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for BLS International Services
How Much Debt Does BLS International Services Carry?
As you can see below, BLS International Services had ₹290.0m of debt at March 2019, down from ₹1.08b a year prior. But on the other hand it also has ₹2.03b in cash, leading to a ₹1.74b net cash position.
How Strong Is BLS International Services's Balance Sheet?
The latest balance sheet data shows that BLS International Services had liabilities of ₹1.02b due within a year, and liabilities of ₹31.8m falling due after that. On the other hand, it had cash of ₹2.03b and ₹1.76b worth of receivables due within a year. So it can boast ₹2.74b more liquid assets than total liabilities.
This surplus strongly suggests that BLS International Services has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. 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.
But the bad news is that BLS International Services has seen its EBIT plunge 20% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since BLS International Services will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.