Compass (NYSE:COMP) Has Debt But No Earnings; Should You Worry?

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.' 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, Compass, Inc. (NYSE:COMP) does carry debt. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Compass

How Much Debt Does Compass Carry?

As you can see below, Compass had US$27.9m of debt at September 2023, down from US$36.5m a year prior. But on the other hand it also has US$220.0m in cash, leading to a US$192.1m net cash position.

A Look At Compass' Liabilities

The latest balance sheet data shows that Compass had liabilities of US$337.6m due within a year, and liabilities of US$448.6m falling due after that. On the other hand, it had cash of US$220.0m and US$75.3m worth of receivables due within a year. So it has liabilities totalling US$490.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Compass has a market capitalization of US$1.74b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Compass boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Compass can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Compass had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$4.9b. To be frank that doesn't bode well.

So How Risky Is Compass?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Compass had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$127m of cash and made a loss of US$396m. However, it has net cash of US$192.1m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Compass has 3 warning signs we think you should be aware of.

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. 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.