Does Comer Industries (BIT:COM) Have A Healthy Balance Sheet?

By
Simply Wall St
Published
May 26, 2021
BIT:COM
Source: Shutterstock

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Comer Industries S.p.A. (BIT:COM) does carry debt. But is this debt a concern to shareholders?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Comer Industries

What Is Comer Industries's Debt?

As you can see below, Comer Industries had €12.1m of debt at December 2020, down from €18.0m a year prior. However, its balance sheet shows it holds €38.2m in cash, so it actually has €26.1m net cash.

debt-equity-history-analysis
BIT:COM Debt to Equity History May 27th 2021

How Strong Is Comer Industries' Balance Sheet?

According to the last reported balance sheet, Comer Industries had liabilities of €129.6m due within 12 months, and liabilities of €33.5m due beyond 12 months. Offsetting this, it had €38.2m in cash and €94.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €30.0m.

Since publicly traded Comer Industries shares are worth a total of €416.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Comer Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Comer Industries grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Comer Industries can strengthen its balance sheet over time. 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. Comer Industries 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 three years, Comer Industries produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Comer Industries's liabilities, but we can be reassured by the fact it has has net cash of €26.1m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in €37m. So we don't think Comer Industries'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. We've identified 2 warning signs with Comer Industries , and understanding them should be part of your investment process.

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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