Polycab India (NSE:POLYCAB) Could Easily Take On More Debt

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. We note that Polycab India Limited (NSE:POLYCAB) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Polycab India

What Is Polycab India's Net Debt?

The image below, which you can click on for greater detail, shows that Polycab India had debt of ₹3.72b at the end of June 2021, a reduction from ₹4.32b over a year. But on the other hand it also has ₹10.2b in cash, leading to a ₹6.52b net cash position.

A Look At Polycab India's Liabilities

We can see from the most recent balance sheet that Polycab India had liabilities of ₹20.9b falling due within a year, and liabilities of ₹2.20b due beyond that. On the other hand, it had cash of ₹10.2b and ₹9.44b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.38b.

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 ₹350.3b 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!

Also positive, Polycab India grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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. 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. Over the most recent three years, Polycab India recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₹6.52b in net cash. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Polycab India's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Polycab India has 2 warning signs we think you should be aware of.

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.

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.

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