We Think Comstock Holding Companies (NASDAQ:CHCI) Can Stay On Top Of Its Debt

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 Comstock Holding Companies, Inc. (NASDAQ:CHCI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Comstock Holding Companies

How Much Debt Does Comstock Holding Companies Carry?

The image below, which you can click on for greater detail, shows that Comstock Holding Companies had debt of US$5.55m at the end of June 2021, a reduction from US$6.15m over a year. However, its balance sheet shows it holds US$10.2m in cash, so it actually has US$4.67m net cash.

How Healthy Is Comstock Holding Companies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Comstock Holding Companies had liabilities of US$5.02m due within 12 months and liabilities of US$12.6m due beyond that. Offsetting these obligations, it had cash of US$10.2m as well as receivables valued at US$3.06m due within 12 months. So its liabilities total US$4.30m more than the combination of its cash and short-term receivables.

Of course, Comstock Holding Companies has a market capitalization of US$46.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In fact Comstock Holding Companies's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Comstock Holding Companies's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. 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 Comstock Holding Companies has US$4.67m in net cash. The cherry on top was that in converted 278% of that EBIT to free cash flow, bringing in US$4.2m. So we don't have any problem with Comstock Holding Companies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Comstock Holding Companies is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.
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