Does Polycab India (NSE:POLYCAB) 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. As with many other companies Polycab India Limited (NSE:POLYCAB) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the IN Electrical industry.

What Is Polycab India's Debt?

As you can see below, Polycab India had ₹1.03b of debt at September 2022, down from ₹2.36b a year prior. However, it does have ₹17.6b in cash offsetting this, leading to net cash of ₹16.6b.

How Strong Is Polycab India's Balance Sheet?

The latest balance sheet data shows that Polycab India had liabilities of ₹21.1b due within a year, and liabilities of ₹1.10b falling due after that. Offsetting these obligations, it had cash of ₹17.6b as well as receivables valued at ₹9.71b due within 12 months. So it actually has ₹5.20b more liquid assets than total liabilities.

Having regard to Polycab India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹415.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Polycab India has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Polycab India grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Polycab India 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, a company can only pay off debt with cold hard cash, not accounting profits. While Polycab India 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. Looking at the most recent three years, Polycab India recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Polycab India has net cash of ₹16.6b, as well as more liquid assets than liabilities. And we liked the look of last year's 40% year-on-year EBIT growth. So is Polycab India's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Polycab India is showing 1 warning sign in our investment analysis , you should know about...

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.