These 4 Measures Indicate That Polyplex (NSE:POLYPLEX) Is Using Debt Reasonably Well

Warren Buffett famously said, '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 can see that Polyplex Corporation Limited (NSE:POLYPLEX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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

See our latest analysis for Polyplex

What Is Polyplex's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Polyplex had debt of ₹8.88b, up from ₹8.24b in one year. However, its balance sheet shows it holds ₹12.3b in cash, so it actually has ₹3.42b net cash.

How Strong Is Polyplex's Balance Sheet?

We can see from the most recent balance sheet that Polyplex had liabilities of ₹14.0b falling due within a year, and liabilities of ₹6.01b due beyond that. Offsetting these obligations, it had cash of ₹12.3b as well as receivables valued at ₹11.8b due within 12 months. So it can boast ₹4.01b more liquid assets than total liabilities.

This surplus suggests that Polyplex has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Polyplex boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Polyplex grew its EBIT by 12% 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 Polyplex 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. While Polyplex 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. In the last three years, Polyplex's free cash flow amounted to 40% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Polyplex has ₹3.42b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 12% in the last twelve months. So is Polyplex's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Polyplex you should know about.

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.