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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Limbach Holdings, Inc. (NASDAQ:LMB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View 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 as of December 2023 Limbach Holdings had US$22.3m of debt, an increase on US$20.8m, over one year. But it also has US$59.8m in cash to offset that, meaning it has US$37.5m net cash.

A Look At Limbach Holdings' Liabilities

The latest balance sheet data shows that Limbach Holdings had liabilities of US$145.1m due within a year, and liabilities of US$38.4m falling due after that. Offsetting this, it had US$59.8m in cash and US$149.4m in receivables that were due within 12 months. So it can boast US$25.8m 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. Simply put, the fact that Limbach Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Limbach Holdings grew its EBIT by 110% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Limbach Holdings has net cash of US$37.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$55m, being 109% 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. For example - Limbach Holdings has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.