Does Blue Square Real Estate (TLV: BLSR) have a healthy balance?

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Warren Buffett famously said, “Volatility is far from synonymous with risk.” When we think about how risky a company is, we always like to look at how it uses debt, as debt overload can lead to ruin. Note that Blue Square Real Estate Ltd (TLV: BLSR) has a debt on the balance sheet. But the more important question is: how big is the risk of this debt?

Why is debt fraught with risk?

Debt is a tool that helps a business grow, but if a business is unable to pay off its creditors, it exists in their power. Ultimately, if the company fails to meet its legal obligations to repay the debt, shareholders may be left with nothing. While this is not very common, we often see that indebted companies continually dilute shareholders because lenders force them to raise capital at a lower cost. Of course, debt can be an important tool in business, especially in capital-heavy businesses. When we study debt levels, we first look at both cash and debt levels together.

Check out our latest analysis on Blue Square Real Estate

What is Blue Square Real Estate Debt?

The image below, which you can click for more details, shows that Blue Square Real Estate had a debt of £ 4.20 billion as of March 2021, up from £ 3.47 billion for the year. On the other hand, he has £ 473.6 million in cash, resulting in a net debt of around £ 3.72 billion.

debt capital analysis
TASE: History of BLSR Debt to Equity, 9 August 2021

How healthy is Blue Square Real Estate’s balance sheet?

The latest balance sheet shows that Blue Square Real Estate had liabilities of £ 1.18 billion due within a year and liabilities of £ 3.70 billion due thereafter. To offset these obligations, he had cash in the amount of £ 473.6 million, as well as accounts receivable in the amount of £ 77.7 million, due within 12 months. Thus, his liabilities are 4.33 billion pounds more than the amount of cash and short-term receivables.

This deficit casts a shadow over the £ 2.71 billion company like a colossus towering over mere mortals. Therefore, we, no doubt, closely monitor its balance. After all, Blue Square Real Estate would likely require a massive recapitalization if it had to pay off its creditors today.

To estimate a company’s debt relative to its bottom line, we calculate its net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA) and earnings before interest and taxes (EBIT) divided by its interest expense (its percentage coverage) … The advantage of this approach is that we take into account both the absolute amount of debt (net debt to EBITDA ratio) and the actual interest expense associated with this debt (with the interest coverage ratio).

Strangely Blue Square Real Estate has an exorbitant EBITDA of 14.4, which implies high debt but good interest coverage of 28.9. So either he has access to very cheap long-term debt, or interest costs will go up! It’s worth noting that Blue Square Real Estate’s EBIT has grown like bamboo after a rain, up 70% in the past twelve months. This will make debt management easier. There is no doubt that the most we learn about debt is from the balance sheet. But it is Blue Square Real Estate’s profits that will influence the balance sheet in the future. So if you want to know more about his earnings it might be worth checking out this is a long term profit trend chart

Finally, the company can only pay off its debts in cash, not taking into account profits. Therefore, it is worth checking how much of this EBIT is provided by free cash flow. Over the past three years, Blue Square Real Estate has recorded free cash flow of 85% of its EBIT, which is higher than we would normally expect. This provides a good opportunity to pay off the debt if needed.

Our view

Blue Square Real Estate’s net debt in relation to EBITDA was indeed negative in this analysis, as was the level of total liabilities. But, like a ballerina finishing a perfect pirouette, she easily covers the interest expenses from EBIT. When we take into account all the factors mentioned above, we take some caution about the use of Blue Square Real Estate’s debt. While debt has upside potential in the form of higher potential returns, we believe that shareholders should definitely consider how the level of debt can make the stock more risky. When analyzing the level of debt, obviously, you should start with the balance sheet. Ultimately, however, each company may contain risks that exist outside the balance sheet. For example, we have defined 3 warning signs for Blue Square Real Estate (1 concerns) you should be aware of this.

Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, then feel free to discover our exclusive list of stocks with net cash gains, today.

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This article by Simply Wall St is general in nature. It is not a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not include the latest announcements from price-sensitive companies or quality content. Simply Wall St has no position in any of the mentioned promotions.
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