Here's Why Poly Medicure (NSE:POLYMED) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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 Poly Medicure Limited (NSE:POLYMED) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Poly Medicure

How Much Debt Does Poly Medicure Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Poly Medicure had ₹1.49b of debt, an increase on ₹1.27b, over one year. However, its balance sheet shows it holds ₹3.02b in cash, so it actually has ₹1.53b net cash.

How Strong Is Poly Medicure's Balance Sheet?

We can see from the most recent balance sheet that Poly Medicure had liabilities of ₹2.93b falling due within a year, and liabilities of ₹422.8m due beyond that. On the other hand, it had cash of ₹3.02b and ₹2.36b worth of receivables due within a year. So it can boast ₹2.02b more liquid assets than total liabilities.

This state of affairs indicates that Poly Medicure'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 ₹138.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Poly Medicure 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 Poly Medicure has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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'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 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 usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Poly Medicure has net cash of ₹1.53b, as well as more liquid assets than liabilities. And we liked the look of last year's 65% year-on-year EBIT growth. So is Poly Medicure's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Poly Medicure, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.