Does Limbach Holdings (NASDAQ:LMB) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Limbach Holdings, Inc. (NASDAQ:LMB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Limbach Holdings

How Much Debt Does Limbach Holdings Carry?

The image below, which you can click on for greater detail, shows that Limbach Holdings had debt of US$29.2m at the end of March 2021, a reduction from US$37.2m over a year. However, it does have US$37.2m in cash offsetting this, leading to net cash of US$8.00m.

A Look At Limbach Holdings' Liabilities

The latest balance sheet data shows that Limbach Holdings had liabilities of US$134.5m due within a year, and liabilities of US$45.2m falling due after that. Offsetting these obligations, it had cash of US$37.2m as well as receivables valued at US$152.2m due within 12 months. So it can boast US$9.73m more liquid assets than total liabilities.

This short term liquidity is a sign that Limbach Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Limbach Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Limbach Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 167% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Limbach Holdings can strengthen its balance sheet over time. 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 Limbach Holdings 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. Over the last three years, Limbach Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Limbach Holdings has US$8.00m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$18m, being 136% of its EBIT. So is Limbach Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that Limbach Holdings is showing 4 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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