Is Polycab India (NSE:POLYCAB) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Polycab India

What Is Polycab India's Net Debt?

As you can see below, at the end of September 2020, Polycab India had ₹2.72b of debt, up from ₹932.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹9.41b in cash, so it actually has ₹6.69b net cash.

How Strong Is Polycab India's Balance Sheet?

According to the last reported balance sheet, Polycab India had liabilities of ₹19.6b due within 12 months, and liabilities of ₹2.65b due beyond 12 months. Offsetting these obligations, it had cash of ₹9.41b as well as receivables valued at ₹11.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.80b.

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 ₹190.7b 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!

While Polycab India doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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.

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. During the last three years, Polycab India produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Polycab India has ₹6.69b in net cash. And it impressed us with free cash flow of ₹4.9b, being 79% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Polycab India is showing 3 warning signs 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. 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.
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