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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Bio-Rad Laboratories, Inc. (NYSE:BIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Bio-Rad Laboratories Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Bio-Rad Laboratories had US$1.19b of debt, an increase on US$1.24m, over one year. But it also has US$2.07b in cash to offset that, meaning it has US$887.1m net cash.
How Healthy Is Bio-Rad Laboratories' Balance Sheet?
We can see from the most recent balance sheet that Bio-Rad Laboratories had liabilities of US$648.3m falling due within a year, and liabilities of US$3.54b due beyond that. Offsetting these obligations, it had cash of US$2.07b as well as receivables valued at US$470.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.65b.
Given Bio-Rad Laboratories has a humongous market capitalization of US$13.9b, 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.
On top of that, Bio-Rad Laboratories grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Bio-Rad Laboratories actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While Bio-Rad Laboratories does have more liabilities than liquid assets, it also has net cash of US$887.1m. And it impressed us with free cash flow of US$459m, being 105% of its EBIT. So is Bio-Rad Laboratories's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Bio-Rad Laboratories that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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