We Think Poly Medicure (NSE:POLYMED) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Poly Medicure Limited (NSE:POLYMED) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Poly Medicure

What Is Poly Medicure's Net Debt?

The image below, which you can click on for greater detail, shows that Poly Medicure had debt of ₹1.29b at the end of September 2022, a reduction from ₹1.36b over a year. However, it does have ₹3.28b in cash offsetting this, leading to net cash of ₹1.99b.

How Healthy Is Poly Medicure's Balance Sheet?

The latest balance sheet data shows that Poly Medicure had liabilities of ₹2.65b due within a year, and liabilities of ₹491.2m falling due after that. On the other hand, it had cash of ₹3.28b and ₹2.17b worth of receivables due within a year. So it can boast ₹2.31b more liquid assets than total liabilities.

This surplus suggests that Poly Medicure has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Poly Medicure has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Poly Medicure grew its EBIT by 14% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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, 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. Considering the last three years, Poly Medicure actually recorded a cash outflow, overall. 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 ₹1.99b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So we don't have any problem with Poly Medicure's use of debt. We'd be motivated to research the stock further if we found out that Poly Medicure insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.