These 4 Measures Indicate That Limbach Holdings (NASDAQ:LMB) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Limbach Holdings, Inc. (NASDAQ:LMB) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Limbach Holdings

What Is Limbach Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Limbach Holdings had US$37.1m of debt in September 2020, down from US$43.1m, one year before. However, it does have US$39.6m in cash offsetting this, leading to net cash of US$2.48m.

A Look At Limbach Holdings' Liabilities

We can see from the most recent balance sheet that Limbach Holdings had liabilities of US$187.0m falling due within a year, and liabilities of US$60.7m due beyond that. On the other hand, it had cash of US$39.6m and US$194.1m worth of receivables due within a year. So its liabilities total US$14.0m more than the combination of its cash and short-term receivables.

Of course, Limbach Holdings has a market capitalization of US$115.6m, 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, Limbach Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Limbach Holdings grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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

Although Limbach Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$2.48m. And it impressed us with free cash flow of US$50m, being 182% of its EBIT. So we don't think Limbach Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 , and 1 of those makes us a bit uncomfortable...

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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