Is Bio-Rad Laboratories (NYSE:BIO) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Bio-Rad Laboratories, Inc. (NYSE:BIO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bio-Rad Laboratories

What Is Bio-Rad Laboratories's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Bio-Rad Laboratories had debt of US$1.19b, up from US$1.24m in one year. But it also has US$1.85b in cash to offset that, meaning it has US$663.1m net cash.

How Healthy Is Bio-Rad Laboratories' Balance Sheet?

According to the last reported balance sheet, Bio-Rad Laboratories had liabilities of US$570.7m due within 12 months, and liabilities of US$3.03b due beyond 12 months. Offsetting this, it had US$1.85b in cash and US$440.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.31b.

Given Bio-Rad Laboratories has a humongous market capitalization of US$13.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bio-Rad Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Bio-Rad Laboratories saw its EBIT drop by 4.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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 generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bio-Rad Laboratories has US$663.1m in net cash. And it impressed us with free cash flow of US$151m, being 85% of its EBIT. So we don't think Bio-Rad Laboratories's use of debt is risky. Even though Bio-Rad Laboratories lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.