Here's Why Comstock Holding Companies (NASDAQ:CHCI) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Comstock Holding Companies, Inc. (NASDAQ:CHCI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Comstock Holding Companies

What Is Comstock Holding Companies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Comstock Holding Companies had US$5.51m of debt in December 2020, down from US$7.00m, one year before. But it also has US$7.06m in cash to offset that, meaning it has US$1.56m net cash.

How Strong Is Comstock Holding Companies' Balance Sheet?

The latest balance sheet data shows that Comstock Holding Companies had liabilities of US$4.50m due within a year, and liabilities of US$12.9m falling due after that. On the other hand, it had cash of US$7.06m and US$5.08m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.22m.

Since publicly traded Comstock Holding Companies shares are worth a total of US$45.0m, 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, Comstock Holding Companies also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Comstock Holding Companies grew its EBIT by 13% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Comstock Holding Companies will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Comstock Holding Companies 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, Comstock Holding Companies 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 Comstock Holding Companies does have more liabilities than liquid assets, it also has net cash of US$1.56m. And it impressed us with free cash flow of US$3.3m, being 473% of its EBIT. So is Comstock Holding Companies's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 4 warning signs we've spotted with Comstock Holding Companies .

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. 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.
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