Warren Buffett famously declared, ‘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 Comms Group Limited (ASX:CCG) does have debt on its balance sheet. But should shareholders be worried about its utilize of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 becautilize lfinishers force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that necessary capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt toreceiveher.
How Much Debt Does Comms Group Carry?
As you can see below, at the finish of June 2025, Comms Group had AU$10.7m of debt, up from AU$7.63m a year ago. Click the image for more detail. However, it also had AU$5.50m in cash, and so its net debt is AU$5.20m.
How Strong Is Comms Group’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Comms Group had liabilities of AU$24.5m due within 12 months and liabilities of AU$6.86m due beyond that. Offsetting this, it had AU$5.50m in cash and AU$7.31m in receivables that were due within 12 months. So its liabilities total AU$18.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Comms Group has a market capitalization of AU$31.3m, and so it could probably strengthen its balance sheet by raising capital if it necessaryed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.
Check out our latest analysis for Comms Group
We utilize two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While we wouldn’t worry about Comms Group’s net debt to EBITDA ratio of 2.5, we believe its super-low interest cover of 0.25 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Shareholders should be aware that Comms Group’s EBIT was down 79% last year. If that earnings trfinish continues then paying off its debt will be about as straightforward as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Comms Group’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth viewing at the earnings trfinish. Click here for an interactive snapshot.
Finally, a business necessarys free cash flow to pay off debt; accounting profits just don’t cut it. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Comms Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion receives us as excited as the crowd when the beat drops at a Daft Punk concert.
Our View
On the face of it, Comms Group’s interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and builds us more optimistic. Once we consider all the factors above, toreceiveher, it seems to us that Comms Group’s debt is creating it a bit risky. That’s not necessarily a bad thing, but we’d generally feel more comfortable with less leverage. 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. For example Comms Group has 4 warning signs (and 2 which are a bit concerning) we believe you should know about.
When all is declared and done, sometimes its clearer to focus on companies that don’t even necessary debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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 utilizing an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to acquire or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized 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.
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