Is bioMérieux (EPA:BIM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

What Risk Does Debt Bring?

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. 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. 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

How Much Debt Does bioMérieux Carry?

The image below, which you can click on for greater detail, shows that at June 2022 bioMérieux had debt of €472.6m, up from €395.4m in one year. But it also has €524.2m in cash to offset that, meaning it has €51.6m net cash.

A Look At bioMérieux's Liabilities

We can see from the most recent balance sheet that bioMérieux had liabilities of €1.02b falling due within a year, and liabilities of €506.6m due beyond that. On the other hand, it had cash of €524.2m and €825.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €177.4m.

This state of affairs indicates that bioMérieux's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €10.6b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, bioMérieux boasts net cash, so it's fair to say it does not have a heavy debt load!

While bioMérieux doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, bioMérieux recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that bioMérieux has €51.6m in net cash. So we don't have any problem with bioMérieux's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for bioMérieux that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.