Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Comfort Systems USA, Inc. (NYSE:FIX) uses debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

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How much debt does Comfort Systems USA have?

The image below, which you can click on for more details, shows that in March 2022, Comfort Systems USA had $412.5 million in debt, up from $171.8 million in one year. However, he has $115.6 million in cash to offset this, resulting in a net debt of approximately $296.9 million.

How healthy is Comfort Systems USA’s balance sheet?

According to the last published balance sheet, Comfort Systems USA had liabilities of $857.2 million due within 12 months and liabilities of $572.8 million due beyond 12 months. In return, he had $115.6 million in cash and $967.7 million in receivables due within 12 months. Thus, its liabilities total $346.7 million more than the combination of its cash and short-term receivables.

Given that publicly traded Comfort Systems USA shares are worth a total of US$3.03 billion, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Comfort Systems USA has a low net debt to EBITDA ratio of just 1.1. And its EBIT covers its interest charges 27.5 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In contrast, Comfort Systems USA has seen its EBIT fall by 6.6% over the last twelve months. This type of decline, if it continues, will obviously make the debt more difficult to manage. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Comfort Systems USA can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Comfort Systems USA has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.

Our point of view

Comfort Systems USA’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But, on a darker note, we are a bit concerned about its EBIT growth rate. When we consider the range of factors above, it appears that Comfort Systems USA is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. Of course, we wouldn’t say no to the extra confidence we’d gain if we knew Comfort Systems USA insiders bought stock: if you’re on the same page, you can find out if insiders are buying by clicking on this link.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.