Is Comfort Systems USA (NYSE:FIX) 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.' 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. We can see that Comfort Systems USA, Inc. (NYSE:FIX) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

View our latest analysis for Comfort Systems USA

What Is Comfort Systems USA's Debt?

The image below, which you can click on for greater detail, shows that Comfort Systems USA had debt of US$47.3m at the end of September 2023, a reduction from US$380.6m over a year. However, it does have US$137.6m in cash offsetting this, leading to net cash of US$90.4m.

How Strong Is Comfort Systems USA's Balance Sheet?

We can see from the most recent balance sheet that Comfort Systems USA had liabilities of US$1.63b falling due within a year, and liabilities of US$304.5m due beyond that. On the other hand, it had cash of US$137.6m and US$1.58b worth of receivables due within a year. So it has liabilities totalling US$217.8m more than its cash and near-term receivables, combined.

Since publicly traded Comfort Systems USA shares are worth a total of US$6.73b, 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 66%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 generation warms our hearts like a puppy in a bumblebee suit.

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$90.4m in net cash. And it impressed us with free cash flow of US$515m, being 113% of its EBIT. 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. For example, we've discovered 1 warning sign for Comfort Systems USA that you should be aware of before investing here.

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.