Comstock Holding Companies (NASDAQ:CHCI) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Comstock Holding Companies, Inc. (NASDAQ:CHCI) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Comstock Holding Companies

What Is Comstock Holding Companies's Debt?

As you can see below, Comstock Holding Companies had US$5.50m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$15.8m in cash to offset that, meaning it has US$10.3m net cash.

How Healthy Is Comstock Holding Companies' Balance Sheet?

According to the last reported balance sheet, Comstock Holding Companies had liabilities of US$6.06m due within 12 months, and liabilities of US$12.2m due beyond 12 months. Offsetting these obligations, it had cash of US$15.8m as well as receivables valued at US$1.74m due within 12 months. So it has liabilities totalling US$740.0k more than its cash and near-term receivables, combined.

Having regard to Comstock Holding Companies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$38.2m company is short on cash, but still worth keeping an eye on the balance sheet. 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.

On top of that, Comstock Holding Companies grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept 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$10.3m in net cash. The cherry on top was that in converted 191% of that EBIT to free cash flow, bringing in US$7.6m. So we don't think Comstock Holding Companies's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Comstock Holding Companies (including 1 which is a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.