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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Bio-Rad Laboratories, Inc. (NYSE:BIO) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Bio-Rad Laboratories

What Is Bio-Rad Laboratories's 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 2024; about the same as the year before. However, its balance sheet shows it holds US$1.62b in cash, so it actually has US$425.8m net cash.

How Healthy Is Bio-Rad Laboratories' Balance Sheet?

The latest balance sheet data shows that Bio-Rad Laboratories had liabilities of US$487.0m due within a year, and liabilities of US$2.42b falling due after that. On the other hand, it had cash of US$1.62b and US$455.3m worth of receivables due within a year. So its liabilities total US$838.2m more than the combination of its cash and short-term receivables.

Given Bio-Rad Laboratories has a market capitalization of US$9.18b, 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!

Bio-Rad Laboratories's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Bio-Rad Laboratories's ability to maintain a healthy balance sheet going forward. 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. 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. During the last three years, Bio-Rad Laboratories produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Bio-Rad Laboratories's liabilities, but we can be reassured by the fact it has has net cash of US$425.8m. 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.

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.