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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Poly Medicure Limited (NSE:POLYMED) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Poly Medicure

What Is Poly Medicure's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Poly Medicure had ₹1.33b of debt, an increase on ₹1.28b, over one year. However, it does have ₹2.80b in cash offsetting this, leading to net cash of ₹1.47b.

A Look At Poly Medicure's Liabilities

According to the last reported balance sheet, Poly Medicure had liabilities of ₹3.21b due within 12 months, and liabilities of ₹381.9m due beyond 12 months. Offsetting these obligations, it had cash of ₹2.80b as well as receivables valued at ₹2.53b due within 12 months. So it actually has ₹1.73b 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 while it's hard to imagine that the ₹139.4b 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.

In addition to that, we're happy to report that Poly Medicure has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 ₹1.47b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 63% over the last year. So we don't think Poly Medicure's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Poly Medicure , and understanding them should be part of your investment process.

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.