Does Bio-Rad Laboratories (NYSE:BIO) Have A 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bio-Rad Laboratories, Inc. (NYSE:BIO) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Bio-Rad Laboratories

What Is Bio-Rad Laboratories's Debt?

As you can see below, Bio-Rad Laboratories had US$1.19b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.85b in cash offsetting this, leading to net cash of US$663.4m.

A Look At Bio-Rad Laboratories' Liabilities

According to the last reported balance sheet, Bio-Rad Laboratories had liabilities of US$589.6m due within 12 months, and liabilities of US$3.31b due beyond 12 months. On the other hand, it had cash of US$1.85b and US$513.1m worth of receivables due within a year. So it has liabilities totalling US$1.54b more than its cash and near-term receivables, combined.

Since publicly traded Bio-Rad Laboratories shares are worth a very impressive total of US$11.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Bio-Rad Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Bio-Rad Laboratories's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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-Rad Laboratories 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Bio-Rad Laboratories may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Bio-Rad Laboratories produced sturdy free cash flow equating to 76% 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 Bio-Rad Laboratories does have more liabilities than liquid assets, it also has net cash of US$663.4m. And it impressed us with free cash flow of US$125m, being 76% of its EBIT. So we are not troubled with Bio-Rad Laboratories's debt use. 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 1 warning sign for Bio-Rad Laboratories you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.