These 4 Measures Indicate That bioMérieux (EPA:BIM) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 bioMérieux S.A. (EPA:BIM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for bioMérieux

What Is bioMérieux's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 bioMérieux had €658.8m of debt, an increase on €537.2m, over one year. However, it does have €589.5m in cash offsetting this, leading to net debt of about €69.3m.

How Strong Is bioMérieux's Balance Sheet?

According to the last reported balance sheet, bioMérieux had liabilities of €1.20b due within 12 months, and liabilities of €524.7m due beyond 12 months. On the other hand, it had cash of €589.5m and €649.8m worth of receivables due within a year. So it has liabilities totalling €481.9m more than its cash and near-term receivables, combined.

Of course, bioMérieux has a titanic market capitalization of €13.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, bioMérieux has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

bioMérieux has a low net debt to EBITDA ratio of only 0.12. And its EBIT covers its interest expense a whopping 23.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that bioMérieux grew its EBIT by 18% last year, making its debt load easier to handle. 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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, bioMérieux's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, bioMérieux's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! It's also worth noting that bioMérieux is in the Medical Equipment industry, which is often considered to be quite defensive. Looking at the bigger picture, we think bioMérieux's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in bioMérieux, you may well want to click here to check an interactive graph of its earnings per share history.

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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