David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Comfort Systems USA, Inc. (NYSE:FIX) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Comfort Systems USA Carry?

You can click the graphic below for the historical numbers, but it shows that Comfort Systems USA had US$89.9m of debt in March 2024, down from US$209.2m, one year before. But it also has US$100.8m in cash to offset that, meaning it has US$10.9m net cash.

How Healthy Is Comfort Systems USA's Balance Sheet?

We can see from the most recent balance sheet that Comfort Systems USA had liabilities of US$2.14b falling due within a year, and liabilities of US$390.6m due beyond that. Offsetting these obligations, it had cash of US$100.8m as well as receivables valued at US$1.81b due within 12 months. So it has liabilities totalling US$615.7m more than its cash and near-term receivables, combined.

Of course, Comfort Systems USA has a titanic market capitalization of US$11.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Comfort Systems USA also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Comfort Systems USA grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Comfort Systems USA's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Comfort Systems USA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Comfort Systems USA actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Comfort Systems USA's liabilities, but we can be reassured by the fact it has has net cash of US$10.9m. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in US$556m. So we don't think Comfort Systems USA's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Comfort Systems USA , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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