Is COMSYS Holdings (TSE:1721) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies COMSYS Holdings Corporation (TSE:1721) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for COMSYS Holdings

How Much Debt Does COMSYS Holdings Carry?

As you can see below, COMSYS Holdings had JP¥19.1b of debt at December 2023, down from JP¥24.5b a year prior. But on the other hand it also has JP¥55.2b in cash, leading to a JP¥36.1b net cash position.

How Strong Is COMSYS Holdings' Balance Sheet?

The latest balance sheet data shows that COMSYS Holdings had liabilities of JP¥122.2b due within a year, and liabilities of JP¥22.0b falling due after that. On the other hand, it had cash of JP¥55.2b and JP¥135.6b worth of receivables due within a year. So it can boast JP¥46.7b more liquid assets than total liabilities.

This surplus suggests that COMSYS Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that COMSYS Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that COMSYS Holdings grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 COMSYS 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While COMSYS 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 most recent three years, COMSYS Holdings recorded free cash flow worth 68% 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 COMSYS Holdings has JP¥36.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in JP¥46b. So is COMSYS Holdings's debt a risk? It doesn't seem so to us. Given COMSYS Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.