Cambium Networks (NASDAQ:CMBM) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Cambium Networks Corporation (NASDAQ:CMBM) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cambium Networks

What Is Cambium Networks's Net Debt?

As you can see below, Cambium Networks had US$28.9m of debt at June 2022, down from US$32.7m a year prior. But it also has US$45.9m in cash to offset that, meaning it has US$17.1m net cash.

A Look At Cambium Networks' Liabilities

Zooming in on the latest balance sheet data, we can see that Cambium Networks had liabilities of US$79.6m due within 12 months and liabilities of US$37.1m due beyond that. On the other hand, it had cash of US$45.9m and US$79.8m worth of receivables due within a year. So it actually has US$9.00m more liquid assets than total liabilities.

Having regard to Cambium Networks' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$488.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cambium Networks boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Cambium Networks's EBIT was down 81% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cambium Networks'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 company can only pay off debt with cold hard cash, not accounting profits. Cambium Networks 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 most recent two years, Cambium Networks recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cambium Networks has US$17.1m in net cash and a decent-looking balance sheet. So we are not troubled with Cambium Networks's debt use. 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. For instance, we've identified 1 warning sign for Cambium Networks that 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.