Is Compass (NYSE:COMP) Using Debt In A Risky Way?

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

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Compass

How Much Debt Does Compass Carry?

As you can see below, Compass had US$27.3m of debt at June 2024, down from US$180.4m a year prior. But it also has US$185.8m in cash to offset that, meaning it has US$158.5m net cash.

How Healthy Is Compass' Balance Sheet?

We can see from the most recent balance sheet that Compass had liabilities of US$385.8m falling due within a year, and liabilities of US$427.7m due beyond that. On the other hand, it had cash of US$185.8m and US$90.0m worth of receivables due within a year. So it has liabilities totalling US$537.7m more than its cash and near-term receivables, combined.

Since publicly traded Compass shares are worth a total of US$2.93b, 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, Compass boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Compass'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.

In the last year Compass wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to US$5.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Compass?

While Compass lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$18m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 1 warning sign for Compass that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.