These 4 Measures Indicate That Meridian Bioscience (NASDAQ:VIVO) Is Using Debt Safely

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.' 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. Importantly, Meridian Bioscience, Inc. (NASDAQ:VIVO) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Meridian Bioscience

What Is Meridian Bioscience's Net Debt?

The chart below, which you can click on for greater detail, shows that Meridian Bioscience had US$50.3m in debt in March 2021; about the same as the year before. However, its balance sheet shows it holds US$63.4m in cash, so it actually has US$13.1m net cash.

How Strong Is Meridian Bioscience's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meridian Bioscience had liabilities of US$50.3m due within 12 months and liabilities of US$79.4m due beyond that. Offsetting this, it had US$63.4m in cash and US$44.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$21.4m.

Given Meridian Bioscience has a market capitalization of US$785.6m, it's hard to believe these liabilities pose much threat. 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 212% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Meridian Bioscience's liabilities, but we can be reassured by the fact it has has net cash of US$13.1m. And we liked the look of last year's 212% year-on-year EBIT growth. So we don't think Meridian Bioscience's use of debt is risky. 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 Meridian Bioscience has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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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