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.' 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. Importantly, Bio-Rad Laboratories, Inc. (NYSE:BIO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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?

As you can see below, Bio-Rad Laboratories had US$1.19b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.61b in cash to offset that, meaning it has US$417.7m net cash.

How Healthy Is Bio-Rad Laboratories' Balance Sheet?

According to the last reported balance sheet, Bio-Rad Laboratories had liabilities of US$522.8m due within 12 months, and liabilities of US$3.04b due beyond 12 months. Offsetting these obligations, it had cash of US$1.61b as well as receivables valued at US$500.9m due within 12 months. So its liabilities total US$1.45b more than the combination of its cash and short-term receivables.

Of course, Bio-Rad Laboratories has a market capitalization of US$7.88b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

It is just as well that Bio-Rad Laboratories's load is not too heavy, because its EBIT was down 25% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Bio-Rad Laboratories produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. 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$417.7m. So we are not troubled with Bio-Rad Laboratories's debt use. 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.

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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