Is Pearl Polymers (NSE:PEARLPOLY) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Pearl Polymers Limited (NSE:PEARLPOLY) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Pearl Polymers

What Is Pearl Polymers's Debt?

As you can see below, at the end of March 2021, Pearl Polymers had ₹283.2m of debt, up from ₹263.8m a year ago. Click the image for more detail. However, it does have ₹23.3m in cash offsetting this, leading to net debt of about ₹259.9m.

How Healthy Is Pearl Polymers' Balance Sheet?

According to the last reported balance sheet, Pearl Polymers had liabilities of ₹604.5m due within 12 months, and liabilities of ₹66.4m due beyond 12 months. Offsetting this, it had ₹23.3m in cash and ₹269.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹378.4m.

When you consider that this deficiency exceeds the company's ₹305.6m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Pearl Polymers's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Pearl Polymers made a loss at the EBIT level, and saw its revenue drop to ₹1.1b, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

Not only did Pearl Polymers's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹101m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹106m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Pearl Polymers you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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