Is Polar Power (NASDAQ:POLA) Using Too Much 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. As with many other companies Polar Power, Inc. (NASDAQ:POLA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 Polar Power

What Is Polar Power's Net Debt?

As you can see below, at the end of March 2021, Polar Power had US$2.41m of debt, up from US$1.03m a year ago. Click the image for more detail. But on the other hand it also has US$11.4m in cash, leading to a US$8.95m net cash position.

How Healthy Is Polar Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Polar Power had liabilities of US$4.50m due within 12 months and liabilities of US$1.34m due beyond that. Offsetting this, it had US$11.4m in cash and US$5.07m in receivables that were due within 12 months. So it can boast US$10.6m 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Polar Power had a loss before interest and tax, and actually shrunk its revenue by 52%, to US$9.5m. To be frank that doesn't bode well.

So How Risky Is Polar Power?

Statistically speaking companies that lose money are riskier than those that make money. 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$8.1m and booked a US$13m accounting loss. But at least it has US$8.95m 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 example Polar Power has 3 warning signs (and 1 which is a bit unpleasant) we think 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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