Meridian Bioscience (NASDAQ:VIVO) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, Meridian Bioscience, Inc. (NASDAQ:VIVO) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Meridian Bioscience

What Is Meridian Bioscience's Debt?

As you can see below, Meridian Bioscience had US$25.0m of debt at March 2022, down from US$50.3m a year prior. However, its balance sheet shows it holds US$76.5m in cash, so it actually has US$51.5m net cash.

How Strong Is Meridian Bioscience's Balance Sheet?

The latest balance sheet data shows that Meridian Bioscience had liabilities of US$56.5m due within a year, and liabilities of US$40.7m falling due after that. Offsetting these obligations, it had cash of US$76.5m as well as receivables valued at US$59.2m due within 12 months. So it actually has US$38.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Meridian Bioscience could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Meridian Bioscience boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Meridian Bioscience's load is not too heavy, because its EBIT was down 20% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. While Meridian Bioscience 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. During the last three years, Meridian Bioscience produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. 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 Meridian Bioscience has net cash of US$51.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$82m, being 72% of its EBIT. So we are not troubled with Meridian Bioscience's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Meridian Bioscience (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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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.