Is Cambium Networks (NASDAQ:CMBM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Cambium Networks Corporation (NASDAQ:CMBM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cambium Networks

How Much Debt Does Cambium Networks Carry?

As you can see below, Cambium Networks had US$29.5m of debt at March 2022, down from US$51.8m a year prior. But on the other hand it also has US$38.4m in cash, leading to a US$8.91m net cash position.

A Look At Cambium Networks' Liabilities

Zooming in on the latest balance sheet data, we can see that Cambium Networks had liabilities of US$64.8m due within 12 months and liabilities of US$37.1m due beyond that. Offsetting this, it had US$38.4m in cash and US$65.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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$393.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Cambium Networks has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Cambium Networks's EBIT fell a jaw-dropping 46% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cambium Networks can strengthen its balance sheet over time. 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. During the last two years, Cambium Networks generated free cash flow amounting to a very robust 88% 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 Cambium Networks has net cash of US$8.91m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$8.0m, being 88% of its EBIT. So we don't have any problem with Cambium Networks's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Cambium Networks , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.