Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Bio-Rad Laboratories's Debt?
As you can see below, Bio-Rad Laboratories had US$427.1m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.03b in cash to offset that, meaning it has US$604.7m net cash.
How Strong Is Bio-Rad Laboratories's Balance Sheet?
We can see from the most recent balance sheet that Bio-Rad Laboratories had liabilities of US$926.9m falling due within a year, and liabilities of US$1.82b due beyond that. On the other hand, it had cash of US$1.03b and US$369.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.34b.
Given Bio-Rad Laboratories has a humongous market capitalization of US$17.2b, 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. Despite its noteworthy liabilities, Bio-Rad Laboratories boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Bio-Rad Laboratories has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 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. 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. Over the last three years, Bio-Rad Laboratories actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
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$604.7m. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$323m. So we don't think Bio-Rad Laboratories's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Bio-Rad Laboratories (including 2 which is are potentially serious) .
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.
This article by Simply Wall St is general in nature. 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.
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