Limbach Holdings (NASDAQ:LMB) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Limbach Holdings, Inc. (NASDAQ:LMB) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Limbach Holdings

What Is Limbach Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Limbach Holdings had US$19.0m of debt in March 2023, down from US$42.1m, one year before. But it also has US$41.4m in cash to offset that, meaning it has US$22.4m net cash.

How Healthy Is Limbach Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Limbach Holdings had liabilities of US$142.5m due within 12 months and liabilities of US$38.8m due beyond that. Offsetting these obligations, it had cash of US$41.4m as well as receivables valued at US$164.1m due within 12 months. So it can boast US$24.2m 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!

In addition to that, we're happy to report that Limbach Holdings has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. 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 Limbach Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Limbach Holdings 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, Limbach Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Limbach Holdings has net cash of US$22.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$46m, being 107% of its EBIT. So we don't think Limbach Holdings's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Limbach Holdings's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.