Is Bio-Rad Laboratories (NYSE:BIO) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Bio-Rad Laboratories, Inc. (NYSE:BIO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Bio-Rad Laboratories had US$1.19b in debt in September 2024; about the same as the year before. But it also has US$1.62b in cash to offset that, meaning it has US$430.9m net cash.

A Look At Bio-Rad Laboratories' Liabilities

According to the last reported balance sheet, Bio-Rad Laboratories had liabilities of US$497.9m due within 12 months, and liabilities of US$2.62b due beyond 12 months. Offsetting these obligations, it had cash of US$1.62b as well as receivables valued at US$473.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.02b.

Given Bio-Rad Laboratories has a market capitalization of US$9.42b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Bio-Rad Laboratories also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Bio-Rad Laboratories saw its EBIT decline by 8.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bio-Rad Laboratories 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. Looking at the most recent three years, Bio-Rad Laboratories recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although Bio-Rad Laboratories's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$430.9m. So we don't have any problem with Bio-Rad Laboratories's use of debt. 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.

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.