Is Bio-Rad Laboratories (NYSE:BIO) using too much debt?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Bio-Rad Laboratories, Inc. (NYSE:BIO) has debt on its balance sheet. But the more important question is: what risk does this debt create?

What risk does debt carry?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.

Discover our latest analyzes for Bio-Rad Laboratories

How much debt does Bio-Rad Laboratories have?

As you can see below, at the end of June 2022, Bio-Rad Laboratories had $1.19 billion in debt, up from $1.24 million a year ago. Click on the image for more details. But on the other hand, it also has $1.97 billion in cash, resulting in a net cash position of $781.0 million.

NYSE: Historical Debt to Equity BIO September 2, 2022

How strong is Bio-Rad Laboratories’ balance sheet?

We can see from the most recent balance sheet that Bio-Rad Laboratories had liabilities of US$613.7 million due within a year, and liabilities of US$3.15 billion due to- of the. In return, he had $1.97 billion in cash and $456.6 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $1.34 billion.

Of course, Bio-Rad Laboratories has a titanic market cap of US$14.6 billion, so those liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities of note, Bio-Rad Laboratories also has more cash than debt, so we’re pretty confident it can manage its debt safely.

And we also warmly note that Bio-Rad Laboratories increased its EBIT by 16% last year, which makes it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Bio-Rad Laboratories 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.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Bio-Rad Laboratories may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, Bio-Rad Laboratories has generated free cash flow of a very strong 93% of its EBIT, more than expected. This puts him in a very strong position to repay his debt.

Summary

While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring to know that Bio-Rad Laboratories has $781.0 million in net cash. And it impressed us with free cash flow of $364 million, or 93% of its EBIT. We therefore do not believe that Bio-Rad Laboratories’ use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Bio-Rad Laboratories shows 1 warning sign in our investment analysis you should know…

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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