Is Comfort Systems USA (NYSE: FIX) Using Too Much Debt?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Comfort Systems USA, Inc. (NYSE: FIX) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for Comfort Systems USA
How much debt does Comfort Systems USA have?
The image below, which you can click for more details, shows that Comfort Systems USA had a debt of $ 171.8 million at the end of March 2021, a reduction from $ 334.0 million. US dollars over one year. However, he also had $ 52.1 million in cash, so his net debt is $ 119.6 million.
A look at the responsibilities of Comfort Systems USA
We can see from the most recent balance sheet that Comfort Systems USA had liabilities of US $ 691.7 million maturing within one year and liabilities of US $ 300.7 million maturing within one year. of the. On the other hand, it had US $ 52.1 million in cash and US $ 681.0 million in receivables due within one year. Its liabilities therefore total US $ 259.3 million more than the combination of its cash and short-term receivables.
Given that the publicly traded shares of Comfort Systems USA are worth a total of US $ 2.66 billion, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Comfort Systems USA’s net debt is only 0.45 times its EBITDA. And its EBIT easily covers its interest costs, being 27.7 times higher. So we’re pretty relaxed about its ultra-conservative use of debt. On top of that, we are happy to report that Comfort Systems USA has increased its EBIT by 30%, reducing the specter of future debt repayments. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Comfort Systems USA’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Comfort Systems USA has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
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 goalkeeper. And the good news does not end there, since its conversion of EBIT into free cash flow also confirms this impression! It seems Comfort Systems USA has no trouble standing on its own and has no reason to fear its lenders. In our opinion, he has a healthy and happy track record. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Note that Comfort Systems USA shows 2 warning signs in our investment analysis , and 1 of them is significant …
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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