Polycab India (NSE:POLYCAB) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Polycab India Limited (NSE:POLYCAB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Polycab India

How Much Debt Does Polycab India Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Polycab India had ₹1.55b of debt, an increase on ₹831.4m, over one year. But on the other hand it also has ₹20.5b in cash, leading to a ₹18.9b net cash position.

How Strong Is Polycab India's Balance Sheet?

The latest balance sheet data shows that Polycab India had liabilities of ₹26.3b due within a year, and liabilities of ₹1.30b falling due after that. Offsetting these obligations, it had cash of ₹20.5b as well as receivables valued at ₹12.6b due within 12 months. So it can boast ₹5.46b more liquid assets than total liabilities.

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 ₹507.5b company is short on cash, but still worth keeping an eye on the 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 67%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Polycab India produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Polycab India has net cash of ₹18.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 67% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Polycab India 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.