Climb Global Solutions (NASDAQ:CLMB) Could Easily Take On More Debt

Warren Buffett famously said, '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. Importantly, Climb Global Solutions, Inc. (NASDAQ:CLMB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Climb Global Solutions

How Much Debt Does Climb Global Solutions Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Climb Global Solutions had debt of US$1.81m, up from none in one year. But on the other hand it also has US$20.2m in cash, leading to a US$18.4m net cash position.

How Strong Is Climb Global Solutions' Balance Sheet?

The latest balance sheet data shows that Climb Global Solutions had liabilities of US$161.7m due within a year, and liabilities of US$9.59m falling due after that. Offsetting this, it had US$20.2m in cash and US$154.6m in receivables that were due within 12 months. So it actually has US$3.56m more liquid assets than total liabilities.

This state of affairs indicates that Climb Global Solutions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$198.2m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Climb Global Solutions has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Climb Global Solutions grew its EBIT by 49% 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 Climb Global Solutions'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 Climb Global Solutions 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, Climb Global Solutions 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 Climb Global Solutions has net cash of US$18.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in US$2.1m. So is Climb Global Solutions's debt a risk? It doesn't seem so to us. 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 Climb Global Solutions is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.