Does bioMérieux (EPA:BIM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that bioMérieux S.A. (EPA:BIM) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for bioMérieux

How Much Debt Does bioMérieux Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 bioMérieux had €462.5m of debt, an increase on €353.6m, over one year. However, it does have €803.5m in cash offsetting this, leading to net cash of €341.0m.

How Strong Is bioMérieux's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that bioMérieux had liabilities of €955.8m due within 12 months and liabilities of €486.4m due beyond that. On the other hand, it had cash of €803.5m and €761.0m worth of receivables due within a year. So it can boast €122.3m more liquid assets than total liabilities.

Having regard to bioMérieux's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €10.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 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 35%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. bioMérieux 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. Over the most recent three years, bioMérieux recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that bioMérieux has net cash of €341.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. So is bioMérieux's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example bioMérieux has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.