These 4 Measures Indicate That bioMérieux (EPA:BIM) Is Using Debt Reasonably Well
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that bioMérieux S.A. (EPA:BIM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for bioMérieux
What Is bioMérieux's Debt?
As you can see below, at the end of June 2019, bioMérieux had €537.2m of debt, up from €455.4m a year ago. Click the image for more detail. However, because it has a cash reserve of €247.7m, its net debt is less, at about €289.5m.
How Strong Is bioMérieux's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that bioMérieux had liabilities of €823.5m due within 12 months and liabilities of €706.4m due beyond that. Offsetting these obligations, it had cash of €247.7m as well as receivables valued at €623.1m due within 12 months. So it has liabilities totalling €659.1m more than its cash and near-term receivables, combined.
Since publicly traded bioMérieux shares are worth a total of €8.89b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
bioMérieux's net debt is only 0.56 times its EBITDA. And its EBIT easily covers its interest expense, being 23.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, bioMérieux grew its EBIT by 7.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if bioMérieux can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, bioMérieux's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Our View
Happily, bioMérieux's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. We would also note that Medical Equipment industry companies like bioMérieux commonly do use debt without problems. When we consider the range of factors above, it looks like bioMérieux is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of bioMérieux's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
