Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 can see that Bio-Rad Laboratories, Inc. (NYSE:BIO) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Bio-Rad Laboratories Carry?
As you can see below, Bio-Rad Laboratories had US$427.9m of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$979.2m in cash offsetting this, leading to net cash of US$551.4m.
A Look At Bio-Rad Laboratories's Liabilities
The latest balance sheet data shows that Bio-Rad Laboratories had liabilities of US$434.0m due within a year, and liabilities of US$1.61b falling due after that. Offsetting these obligations, it had cash of US$979.2m as well as receivables valued at US$356.0m due within 12 months. So it has liabilities totalling US$710.7m more than its cash and near-term receivables, combined.
Of course, Bio-Rad Laboratories has a titanic market capitalization of US$10.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
Also positive, Bio-Rad Laboratories grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bio-Rad Laboratories's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bio-Rad Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Bio-Rad Laboratories produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
We could understand if investors are concerned about Bio-Rad Laboratories's liabilities, but we can be reassured by the fact it has has net cash of US$551.4m. And it impressed us with its EBIT growth of 27% over the last year. So we don't think Bio-Rad Laboratories's use of debt is risky. We'd be very excited to see if Bio-Rad Laboratories insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.