Does Poly Medicure (NSE:POLYMED) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Poly Medicure Limited (NSE:POLYMED) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Poly Medicure

What Is Poly Medicure's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Poly Medicure had debt of ₹1.58b, up from ₹1.33b in one year. But it also has ₹12.5b in cash to offset that, meaning it has ₹10.9b net cash.

How Strong Is Poly Medicure's Balance Sheet?

The latest balance sheet data shows that Poly Medicure had liabilities of ₹4.17b due within a year, and liabilities of ₹440.1m falling due after that. On the other hand, it had cash of ₹12.5b and ₹3.29b worth of receivables due within a year. So it can boast ₹11.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Poly Medicure could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Poly Medicure boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Poly Medicure grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Poly Medicure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Poly Medicure 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, Poly Medicure recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Poly Medicure has ₹10.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 26% year-on-year EBIT growth. So we are not troubled with Poly Medicure's debt use. 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 Poly Medicure is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.