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. We note that Polycab India Limited (NSE:POLYCAB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Polycab India

How Much Debt Does Polycab India Carry?

As you can see below, Polycab India had ₹1.10b of debt at September 2024, down from ₹1.59b a year prior. However, it does have ₹25.3b in cash offsetting this, leading to net cash of ₹24.2b.

A Look At Polycab India's Liabilities

Zooming in on the latest balance sheet data, we can see that Polycab India had liabilities of ₹46.8b due within 12 months and liabilities of ₹3.65b due beyond that. Offsetting these obligations, it had cash of ₹25.3b as well as receivables valued at ₹23.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.71b.

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 ₹977.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Polycab India boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Polycab India grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Polycab India's liabilities, but we can be reassured by the fact it has has net cash of ₹24.2b. And it also grew its EBIT by 12% over the last year. So we don't have any problem with Polycab India's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Polycab India that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.