Comfort Systems USA (NYSE:FIX) Could Easily Take On More Debt

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, Comfort Systems USA, Inc. (NYSE:FIX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Comfort Systems USA

What Is Comfort Systems USA's Net Debt?

As you can see below, at the end of September 2024, Comfort Systems USA had US$68.4m of debt, up from US$47.3m a year ago. Click the image for more detail. However, it does have US$415.6m in cash offsetting this, leading to net cash of US$347.2m.

A Look At Comfort Systems USA's Liabilities

The latest balance sheet data shows that Comfort Systems USA had liabilities of US$2.43b due within a year, and liabilities of US$395.9m falling due after that. Offsetting this, it had US$415.6m in cash and US$2.03b in receivables that were due within 12 months. So it has liabilities totalling US$379.9m more than its cash and near-term receivables, combined.

Since publicly traded Comfort Systems USA shares are worth a very impressive total of US$13.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Comfort Systems USA also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Comfort Systems USA has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Comfort Systems USA 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Comfort Systems USA 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. Happily for any shareholders, Comfort Systems USA actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Comfort Systems USA has US$347.2m in net cash. And it impressed us with free cash flow of US$716m, being 112% of its EBIT. So we don't think Comfort Systems USA's use of debt is risky. We'd be very excited to see if Comfort Systems USA insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.