Polaris Media (OB:POL) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Polaris Media ASA (OB:POL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Polaris Media

What Is Polaris Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Polaris Media had kr506.6m of debt, an increase on kr201.4m, over one year. But it also has kr710.3m in cash to offset that, meaning it has kr203.7m net cash.

How Healthy Is Polaris Media's Balance Sheet?

According to the last reported balance sheet, Polaris Media had liabilities of kr1.17b due within 12 months, and liabilities of kr1.68b due beyond 12 months. On the other hand, it had cash of kr710.3m and kr277.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.87b.

This deficit is considerable relative to its market capitalization of kr2.90b, so it does suggest shareholders should keep an eye on Polaris Media's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Polaris Media boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Polaris Media grew its EBIT by 174% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Polaris Media'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Polaris Media 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, Polaris Media actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Polaris Media does have more liabilities than liquid assets, it also has net cash of kr203.7m. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in kr236m. So is Polaris Media'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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Polaris Media (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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