Does Polycab India (NSE:POLYCAB) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Polycab India Limited (NSE:POLYCAB) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Polycab India

How Much Debt Does Polycab India Carry?

As you can see below, at the end of December 2022, Polycab India had ₹1.43b of debt, up from ₹792.6m a year ago. Click the image for more detail. But it also has ₹20.1b in cash to offset that, meaning it has ₹18.7b net cash.

A Look At Polycab India's Liabilities

We can see from the most recent balance sheet that Polycab India had liabilities of ₹20.4b falling due within a year, and liabilities of ₹1.18b due beyond that. On the other hand, it had cash of ₹20.1b and ₹9.88b worth of receivables due within a year. So it actually has ₹8.44b more liquid assets than total liabilities.

This state of affairs indicates that Polycab India's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹447.3b company is short on cash, but still worth keeping an eye on the 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 53% 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. Polycab India 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. Looking at the most recent three years, Polycab India recorded free cash flow of 41% 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 ₹18.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 53% 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. To that end, you should be aware of the 1 warning sign we've spotted with Polycab India .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.