Does Comfort Systems USA (NYSE:FIX) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Comfort Systems USA, Inc. (NYSE:FIX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Comfort Systems USA

How Much Debt Does Comfort Systems USA Carry?

As you can see below, Comfort Systems USA had US$91.1m of debt at June 2024, down from US$147.3m a year prior. But on the other hand it also has US$199.4m in cash, leading to a US$108.4m net cash position.

How Strong Is Comfort Systems USA's Balance Sheet?

According to the last reported balance sheet, Comfort Systems USA had liabilities of US$2.33b due within 12 months, and liabilities of US$396.7m due beyond 12 months. On the other hand, it had cash of US$199.4m and US$2.01b worth of receivables due within a year. So it has liabilities totalling US$517.6m more than its cash and near-term receivables, combined.

Of course, Comfort Systems USA has a titanic market capitalization of US$10.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Comfort Systems USA boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Comfort Systems USA grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Comfort Systems USA'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, 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. Over the last three years, Comfort Systems USA actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Comfort Systems USA's liabilities, but we can be reassured by the fact it has has net cash of US$108.4m. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in US$622m. So we don't think Comfort Systems USA's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Comfort Systems USA is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com