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

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. We note that Comfort Systems USA, Inc. (NYSE:FIX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Comfort Systems USA

How Much Debt Does Comfort Systems USA Carry?

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. But on the other hand it also has US$415.6m in cash, leading to a US$347.2m net cash position.

A Look At Comfort Systems USA's Liabilities

We can see from the most recent balance sheet that Comfort Systems USA had liabilities of US$2.43b falling due within a year, and liabilities of US$395.9m due beyond that. Offsetting these obligations, it had cash of US$415.6m as well as receivables valued at US$2.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$379.9m.

Since publicly traded Comfort Systems USA shares are worth a very impressive total of US$16.4b, 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. 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 76% 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. 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. 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. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in US$716m. So is Comfort Systems USA's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Comfort Systems USA you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.