Health Check: How Prudently Does Polar Power (NASDAQ:POLA) Use 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. We can see that Polar Power, Inc. (NASDAQ:POLA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Polar Power

How Much Debt Does Polar Power Carry?

As you can see below, Polar Power had US$2.34m of debt at June 2021, down from US$2.66m a year prior. However, its balance sheet shows it holds US$8.54m in cash, so it actually has US$6.20m net cash.

How Strong Is Polar Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polar Power had liabilities of US$5.29m due within 12 months and liabilities of US$1.03m due beyond that. Offsetting these obligations, it had cash of US$8.54m as well as receivables valued at US$5.67m due within 12 months. So it can boast US$7.89m more liquid assets than total liabilities.

This surplus suggests that Polar Power has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Polar Power boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Polar Power's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Polar Power reported revenue of US$13m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Polar Power?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Polar Power had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$9.0m and booked a US$11m accounting loss. But at least it has US$6.20m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 5 warning signs for Polar Power (2 are potentially serious) 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.

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.

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