Is Polar Power (NASDAQ:POLA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Polar Power, Inc. (NASDAQ:POLA) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

What Is Polar Power's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Polar Power had debt of US$5.06m, up from US$4.56m in one year. However, it does have US$498.0k in cash offsetting this, leading to net debt of about US$4.57m.

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$8.56m due within 12 months and liabilities of US$474.0k due beyond that. Offsetting this, it had US$498.0k in cash and US$2.15m in receivables that were due within 12 months. So it has liabilities totalling US$6.38m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$6.07m 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 Polar Power's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

See our latest analysis for Polar Power

Over 12 months, Polar Power made a loss at the EBIT level, and saw its revenue drop to US$14m, which is a fall of 8.7%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Polar Power produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$4.4m at the EBIT level. 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. Not least because it burned through US$555k in negative free cash flow over the last year. So suffice it to say 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. For instance, we've identified 3 warning signs for Polar Power (2 are significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.