Polycab India (NSE:POLYCAB) Has A Pretty 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. Importantly, Polycab India Limited (NSE:POLYCAB) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

How Much Debt Does Polycab India Carry?

As you can see below, Polycab India had ₹931.8m of debt at December 2023, down from ₹1.43b a year prior. However, it does have ₹19.2b in cash offsetting this, leading to net cash of ₹18.3b.

How Strong Is Polycab India's Balance Sheet?

We can see from the most recent balance sheet that Polycab India had liabilities of ₹29.6b falling due within a year, and liabilities of ₹2.44b due beyond that. On the other hand, it had cash of ₹19.2b and ₹15.1b worth of receivables due within a year. So it actually has ₹2.22b more liquid assets than total liabilities.

Having regard to Polycab India's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹924.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Polycab India boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Polycab India has boosted its EBIT by 38%, 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Polycab India reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Polycab India has net cash of ₹18.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So is Polycab India's debt a risk? It doesn't seem so to us. 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, we've discovered 2 warning signs for Polycab India (1 is concerning!) that you should be aware of before investing here.

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.