Polaris Media (OB:POL) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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. We note that Polaris Media ASA (OB:POL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Polaris Media

What Is Polaris Media's Net Debt?

The chart below, which you can click on for greater detail, shows that Polaris Media had kr502.0m in debt in March 2021; about the same as the year before. However, it does have kr779.6m in cash offsetting this, leading to net cash of kr277.6m.

How Strong Is Polaris Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polaris Media had liabilities of kr1.20b due within 12 months and liabilities of kr1.81b due beyond that. On the other hand, it had cash of kr779.6m and kr293.2m worth of receivables due within a year. So its liabilities total kr1.93b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Polaris Media is worth kr3.26b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Polaris Media also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Polaris Media grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Polaris Media will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Polaris Media does have more liabilities than liquid assets, it also has net cash of kr277.6m. And it impressed us with free cash flow of kr236m, being 208% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Polaris Media you should be aware of, and 1 of them is potentially serious.

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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This article by Simply Wall St is general in nature. 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.
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