We Think Bio-Rad Laboratories (NYSE:BIO) Can Stay On Top Of Its Debt

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.' 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. We note that Bio-Rad Laboratories, Inc. (NYSE:BIO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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-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 June 2023; about the same as the year before. But on the other hand it also has US$1.72b in cash, leading to a US$534.2m net cash position.

How Strong Is Bio-Rad Laboratories' Balance Sheet?

The latest balance sheet data shows that Bio-Rad Laboratories had liabilities of US$582.0m due within a year, and liabilities of US$2.95b falling due after that. Offsetting these obligations, it had cash of US$1.72b as well as receivables valued at US$500.7m due within 12 months. So its liabilities total US$1.31b more than the combination of its cash and short-term receivables.

Given Bio-Rad Laboratories has a humongous market capitalization of US$11.1b, 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!

The modesty of its debt load may become crucial for Bio-Rad Laboratories if management cannot prevent a repeat of the 35% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. 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. Over the most recent three years, Bio-Rad Laboratories recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Bio-Rad Laboratories does have more liabilities than liquid assets, it also has net cash of US$534.2m. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in US$153m. So we don't have any problem with Bio-Rad Laboratories's use of debt. While Bio-Rad Laboratories didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.