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. As with many other companies Bio-Rad Laboratories, Inc. (NYSE:BIO) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Bio-Rad Laboratories
What Is Bio-Rad Laboratories’s Debt?
The chart below, which you can click on for greater detail, shows that Bio-Rad Laboratories had US$1.19b in debt in September 2023; about the same as the year before. But on the other hand it also has US$1.76b in cash, leading to a US$570.0m net cash position.
How Healthy Is Bio-Rad Laboratories’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bio-Rad Laboratories had liabilities of US$558.2m due within 12 months and liabilities of US$2.92b due beyond that. On the other hand, it had cash of US$1.76b and US$468.6m worth of receivables due within a year. So it has liabilities totalling US$1.25b more than its cash and near-term receivables, combined.
Given Bio-Rad Laboratories has a market capitalization of US$8.73b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Bio-Rad Laboratories also has more cash than debt, so we’re pretty confident it can manage its debt safely.
The modesty of its debt load may become crucial for Bio-Rad Laboratories if management cannot prevent a repeat of the 29% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bio-Rad Laboratories can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Bio-Rad Laboratories has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Bio-Rad Laboratories recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
Although Bio-Rad Laboratories’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$570.0m. And it impressed us with free cash flow of US$223m, being 70% of its EBIT. So we are not troubled with Bio-Rad Laboratories’s debt use. Even though Bio-Rad Laboratories lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
