Here's Why Polycab India (NSE:POLYCAB) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Polycab India Limited (NSE:POLYCAB) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Polycab India

What Is Polycab India's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Polycab India had ₹2.19b of debt, an increase on ₹840.1m, over one year. But on the other hand it also has ₹12.3b in cash, leading to a ₹10.1b net cash position.

How Strong Is Polycab India's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polycab India had liabilities of ₹24.1b due within 12 months and liabilities of ₹1.47b due beyond that. Offsetting this, it had ₹12.3b in cash and ₹13.0b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Polycab India's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹772.2b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Polycab India also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Polycab India has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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 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 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Polycab India has ₹10.1b in net cash. And it impressed us with its EBIT growth of 51% over the last year. So is Polycab India's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for Polycab India that you should be aware of before investing here.

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.