is bioMérieux (EPA:BIM) taking on too much debt?

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that bioMérieux SA (EPA:BIM) uses debt in its business. But should shareholders worry about its use of debt?

What risk does debt carry?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

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What is bioMérieux’s debt?

The image below, which you can click on for more details, shows that in June 2022, bioMérieux had a debt of €472.6m, compared to €395.4m in one year. But he also has €524.2m in cash to offset that, meaning he has €51.6m in net cash.

ENXTPA: BIM Debt to Equity History September 14, 2022

A look at bioMérieux’s liabilities

We can see on the most recent balance sheet that bioMérieux had liabilities of 1.02 billion euros within one year and liabilities of 506.6 million euros beyond. On the other hand, it has cash of €524.2 million and €825.7 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €177.4 million.

This indicates that bioMérieux’s balance sheet looks quite strong, with total liabilities roughly equal to its cash. It is therefore very unlikely that the 10.6 billion euro company will run out of cash, but it is still worth keeping an eye on the balance sheet. Despite significant liabilities, bioMérieux has a net cash position, so it is fair to say that it is not heavily indebted!

If bioMérieux does not seem to have gained much on the EBIT line, at least earnings remain stable for now. There is no doubt that we learn the most about debt from the balance sheet. But it is above all future results that will determine bioMérieux’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. bioMérieux may have net cash on the balance sheet, but it is always interesting to look at the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, bioMérieux has recorded free cash flow of 47% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Summary

While it is always wise to look at a company’s total liabilities, it is very reassuring that bioMérieux has €51.6 million in net cash. We therefore have no problem with the use of debt by bioMérieux. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for bioMérieux which you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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