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.' 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?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Limbach Holdings

What Is Limbach Holdings's Debt?

As you can see below, Limbach Holdings had US$9.60m of debt at June 2023, down from US$28.9m a year prior. However, it does have US$45.9m in cash offsetting this, leading to net cash of US$36.3m.

How Strong Is Limbach Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Limbach Holdings had liabilities of US$127.3m due within 12 months and liabilities of US$34.5m due beyond that. Offsetting these obligations, it had cash of US$45.9m as well as receivables valued at US$147.5m due within 12 months. So it can boast US$31.6m 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!

On top of that, Limbach Holdings grew its EBIT by 73% over the last twelve months, and that growth will make it easier to handle its debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Limbach Holdings generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Limbach Holdings has net cash of US$36.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$47m, being 99% of its EBIT. So we don't think Limbach Holdings'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. For example - Limbach Holdings has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.