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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Polycab India

What Is Polycab India's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Polycab India had debt of ₹1.59b, up from ₹1.03b in one year. However, it does have ₹16.9b in cash offsetting this, leading to net cash of ₹15.3b.

A Look At Polycab India's Liabilities

According to the last reported balance sheet, Polycab India had liabilities of ₹24.8b due within 12 months, and liabilities of ₹1.80b due beyond 12 months. On the other hand, it had cash of ₹16.9b and ₹13.3b worth of receivables due within a year. So it actually has ₹3.59b 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 ₹851.4b 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.

In addition to that, we're happy to report that Polycab India has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Polycab India's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Polycab India has ₹15.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So is Polycab India's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Polycab India (at least 1 which is concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.