Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Poly Medicine Limited (NSE: POLYMED) uses debt in its business. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Poly Medicure
What is Poly Medicure’s debt?
You can click on the chart below for historical figures, but it shows Poly Medicure had ₹1.25bn in debt in March 2022, up from ₹1.34bn a year prior. However, he has ₹3.52 billion in cash to offset this, resulting in a net cash of ₹2.27 billion.
How solid is Poly Médecine’s balance sheet?
The latest balance sheet data shows that Poly Medicure had liabilities of ₹2.27 billion due within one year, and liabilities of ₹626.8 million falling due thereafter. In return, he had ₹3.52 billion in cash and ₹2.07 billion in receivables due within 12 months. So he actually has ₹2.70 billion After liquid assets than total liabilities.
This surplus suggests that Poly Médecine has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that Poly Medicure has more cash than debt is probably a good indication that it can safely manage its debt.
In contrast, Poly Medicure has seen its EBIT fall by 4.6% over the last twelve months. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Poly Medicure can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Poly Medicure has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how fast it’s building ( or erodes) that cash. balance. Over the past three years, Poly Medicure has generated free cash flow of 3.1% of its EBIT, a performance without interest. This low level of cash conversion compromises its ability to manage and repay its debt.
While we sympathize with investors who find debt a concern, you should bear in mind that Poly Medicure has a net cash position of ₹2.27 billion, as well as more liquid assets than liabilities. We are therefore not concerned about Poly Medicure’s use of debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 3 warning signs for Poly Medicure you should be aware, and 1 of them is a bit unpleasant.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.