Poly Medicure (NSE:POLYMED) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Poly Medicure

How Much Debt Does Poly Medicure Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Poly Medicure had debt of ₹1.74b, up from ₹1.49b in one year. But on the other hand it also has ₹2.86b in cash, leading to a ₹1.12b net cash position.

How Strong Is Poly Medicure's Balance Sheet?

The latest balance sheet data shows that Poly Medicure had liabilities of ₹3.51b due within a year, and liabilities of ₹373.8m falling due after that. On the other hand, it had cash of ₹2.86b and ₹2.70b worth of receivables due within a year. So it can boast ₹1.68b more liquid assets than total liabilities.

Having regard to Poly Medicure's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹184.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Poly Medicure has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Poly Medicure has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Poly Medicure can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Poly Medicure 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 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 it is always sensible to investigate a company's debt, in this case Poly Medicure has ₹1.12b in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't have any problem with Poly Medicure's use of debt. 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.

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.

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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.