bioMérieux (EPA:BIM) Could Easily Take On More Debt

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. Importantly, bioMérieux S.A. (EPA:BIM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for bioMérieux

What Is bioMérieux's Net Debt?

As you can see below, bioMérieux had €358.8m of debt at December 2020, down from €461.9m a year prior. But it also has €389.2m in cash to offset that, meaning it has €30.4m net cash.

How Strong Is bioMérieux's Balance Sheet?

We can see from the most recent balance sheet that bioMérieux had liabilities of €923.8m falling due within a year, and liabilities of €522.7m due beyond that. On the other hand, it had cash of €389.2m and €730.4m worth of receivables due within a year. So it has liabilities totalling €326.9m more than its cash and near-term receivables, combined.

Since publicly traded bioMérieux shares are worth a very impressive total of €12.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, bioMérieux boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that bioMérieux has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine bioMérieux'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. While bioMérieux 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. In the last three years, bioMérieux's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that bioMérieux has €30.4m in net cash. And it impressed us with its EBIT growth of 58% over the last year. So is bioMérieux's debt a risk? It doesn't seem so to us. 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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