Yahoo Finance Comstock Holding Companies (NASDAQ:CHCI) Could Easily Take On More Debt
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Comstock Holding Companies, Inc. (NASDAQ:CHCI) does carry debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?
The chart below, which you can click on for greater detail, shows that Comstock Holding Companies had US$5.50m in debt in December 2021; about the same as the year before. However, it does have US$15.8m in cash offsetting this, leading to net cash of US$10.3m.
A Look At Comstock Holding Companies' Liabilities
The latest balance sheet data shows that Comstock Holding Companies had liabilities of US$6.06m due within a year, and liabilities of US$12.2m falling due after that. Offsetting this, it had US$15.8m in cash and US$1.74m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$740.0k.
This state of affairs indicates that Comstock Holding Companies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$37.2m company is struggling for cash, we still think it's worth monitoring its 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.
In addition to that, we're happy to report that Comstock Holding Companies has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Comstock Holding Companies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
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. Over the last three years, Comstock Holding Companies 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 Comstock Holding Companies's liabilities, but we can be reassured by the fact it has has net cash of US$10.3m. And it impressed us with free cash flow of US$7.6m, being 191% of its EBIT. So is Comstock Holding Companies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. 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) .
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.
