Poly Medicure (NSE:POLYMED) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, Poly Medicure had ₹1.34b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹4.04b in cash, so it actually has ₹2.70b net cash.

How Healthy Is Poly Medicure's Balance Sheet?

We can see from the most recent balance sheet that Poly Medicure had liabilities of ₹2.41b falling due within a year, and liabilities of ₹772.1m due beyond that. Offsetting this, it had ₹4.04b in cash and ₹1.98b in receivables that were due within 12 months. So it actually has ₹2.84b 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!

And we also note warmly that Poly Medicure grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Poly Medicure has net cash of ₹2.70b, as well as more liquid assets than liabilities. And it also grew its EBIT by 14% over the last year. So we don't think Poly Medicure's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Poly Medicure you should be aware of, and 1 of them is potentially serious.

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.