These 4 Measures Indicate That Comfort Systems USA (NYSE:FIX) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Comfort Systems USA, Inc. (NYSE:FIX) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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$44.2m of debt at December 2023, down from US$256.2m a year prior. However, its balance sheet shows it holds US$205.2m in cash, so it actually has US$160.9m net cash.

How Strong Is Comfort Systems USA's Balance Sheet?

The latest balance sheet data shows that Comfort Systems USA had liabilities of US$1.72b due within a year, and liabilities of US$306.5m falling due after that. On the other hand, it had cash of US$205.2m and US$1.59b worth of receivables due within a year. So it has liabilities totalling US$236.5m more than its cash and near-term receivables, combined.

Given Comfort Systems USA has a humongous market capitalization of US$10.8b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

On top of that, Comfort Systems USA grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Comfort Systems USA 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. 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$160.9m in net cash. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in US$545m. So we don't think Comfort Systems USA'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 1 warning sign with Comfort Systems USA , and understanding them should be part of your investment process.

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.