Bio-Techne (NASDAQ:TECH) Has A Rock Solid 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.' 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. As with many other companies Bio-Techne Corporation (NASDAQ:TECH) makes use of debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Bio-Techne

How Much Debt Does Bio-Techne Carry?

As you can see below, Bio-Techne had US$200.0m of debt at December 2022, down from US$286.5m a year prior. On the flip side, it has US$196.8m in cash leading to net debt of about US$3.24m.

How Healthy Is Bio-Techne's Balance Sheet?

According to the last reported balance sheet, Bio-Techne had liabilities of US$128.4m due within 12 months, and liabilities of US$407.9m due beyond 12 months. Offsetting this, it had US$196.8m in cash and US$184.8m in receivables that were due within 12 months. So its liabilities total US$154.8m more than the combination of its cash and short-term receivables.

Having regard to Bio-Techne's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$11.4b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Bio-Techne has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.0092 times EBITDA and EBIT covering interest a whopping 30.7 times, it's clear that Bio-Techne is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. Fortunately, Bio-Techne grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bio-Techne can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Bio-Techne actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Bio-Techne's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Considering this range of factors, it seems to us that Bio-Techne is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Bio-Techne, you may well want to click here to check an interactive graph of its earnings per share history.

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.