Meridian Bioscience (NASDAQ:VIVO) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Meridian Bioscience, Inc. (NASDAQ:VIVO) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Meridian Bioscience

What Is Meridian Bioscience's Debt?

You can click the graphic below for the historical numbers, but it shows that Meridian Bioscience had US$59.5m of debt in December 2020, down from US$75.8m, one year before. But it also has US$63.2m in cash to offset that, meaning it has US$3.68m net cash.

A Look At Meridian Bioscience's Liabilities

According to the last reported balance sheet, Meridian Bioscience had liabilities of US$53.8m due within 12 months, and liabilities of US$91.2m due beyond 12 months. Offsetting these obligations, it had cash of US$63.2m as well as receivables valued at US$40.9m due within 12 months. So it has liabilities totalling US$40.9m more than its cash and near-term receivables, combined.

Of course, Meridian Bioscience has a market capitalization of US$1.07b, 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. While it does have liabilities worth noting, Meridian Bioscience also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Meridian Bioscience grew its EBIT by 161% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Meridian Bioscience's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Meridian Bioscience recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Meridian Bioscience has US$3.68m in net cash. And it impressed us with its EBIT growth of 161% over the last year. So is Meridian Bioscience's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Meridian Bioscience (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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