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Is Meridian Bioscience (NASDAQ:VIVO) A Risky Investment?

Simply Wall St

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Meridian Bioscience, Inc. (NASDAQ:VIVO) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Meridian Bioscience

What Is Meridian Bioscience's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Meridian Bioscience had US$75.8m of debt, an increase on US$51.3m, over one year. On the flip side, it has US$55.2m in cash leading to net debt of about US$20.6m.

NasdaqGS:VIVO Historical Debt, October 31st 2019
NasdaqGS:VIVO Historical Debt, October 31st 2019

How Strong Is Meridian Bioscience's Balance Sheet?

The latest balance sheet data shows that Meridian Bioscience had liabilities of US$19.8m due within a year, and liabilities of US$114.1m falling due after that. On the other hand, it had cash of US$55.2m and US$32.0m worth of receivables due within a year. So it has liabilities totalling US$46.7m more than its cash and near-term receivables, combined.

Given Meridian Bioscience has a market capitalization of US$416.0m, 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.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Meridian Bioscience has a low net debt to EBITDA ratio of only 0.40. And its EBIT covers its interest expense a whopping 51.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. While Meridian Bioscience doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Meridian Bioscience'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Meridian Bioscience produced sturdy free cash flow equating to 78% 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.

Our View

Meridian Bioscience's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. We would also note that Medical Equipment industry companies like Meridian Bioscience commonly do use debt without problems. Zooming out, Meridian Bioscience seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. We'd be very excited to see if Meridian Bioscience 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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 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.