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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Poly Medicure Limited (NSE: POLYMED) uses debt. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Poly Medicure
How much debt does Poly Medicure have?
The image below, which you can click for more details, shows that Poly Medicure had a debt of 1.02 billion yen at the end of March 2021, a reduction from 2.02 billion yen year on year. However, his balance sheet shows that he holds 3.79 billion yen in cash, so he actually has 2.77 billion yen in net cash.
Is Poly Medicure’s track record healthy?
We can see from the most recent balance sheet that Poly Medicure had liabilities of 1.71 billion yen due within one year and liabilities of 867.6 million yen due beyond. On the other hand, he had cash of 3.79 billion yen and 1.57 billion yen in receivables within a year. So it actually has ₹ 2.77b After liquid assets as total liabilities.
This short-term liquidity is a sign that Poly Medicure could probably pay off its debt easily, as its balance sheet is far from tight. Put simply, the fact that Poly Medicure has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, Poly Medicure has increased its EBIT by 35% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the future benefits, more than anything, that will determine Poly Medicure’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While 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) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. For the past three years, Poly Medicure has reported free cash flow of 20% of its EBIT, which is really pretty low. This low level of cash conversion undermines its ability to manage and repay its debts.
In summary
While we agree with those investors who find the debt of concern, you should keep in mind that Poly Medicure has net cash of 2.77 billion yen, as well as more liquid assets than liabilities. . And we liked the appearance of the 35% year-over-year EBIT growth from last year. So we don’t think Poly Medicure’s use of debt is risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Example: we have spotted 1 warning sign for Poly Medicure you must be aware.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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