We Think Comstock Holding Companies (NASDAQ:CHCI) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Comstock Holding Companies, Inc. (NASDAQ:CHCI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Comstock Holding Companies

How Much Debt Does Comstock Holding Companies Carry?

As you can see below, Comstock Holding Companies had US$5.51m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$12.7m in cash, so it actually has US$7.14m net cash.

How Strong 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$4.73m due within 12 months and liabilities of US$12.4m due beyond that. Offsetting this, it had US$12.7m in cash and US$4.62m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Comstock Holding Companies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$42.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Comstock Holding Companies has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Comstock Holding Companies grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Comstock Holding Companies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Comstock Holding Companies has US$7.14m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$4.9m, being 168% of its EBIT. So is Comstock Holding Companies's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Comstock Holding Companies (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.