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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AcuityAds Holdings Inc. (TSE:AT) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is AcuityAds Holdings's Debt?
The image below, which you can click on for greater detail, shows that AcuityAds Holdings had debt of CA$7.83m at the end of September 2021, a reduction from CA$12.3m over a year. But it also has CA$100.3m in cash to offset that, meaning it has CA$92.5m net cash.
A Look At AcuityAds Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that AcuityAds Holdings had liabilities of CA$25.4m due within 12 months and liabilities of CA$7.11m due beyond that. Offsetting this, it had CA$100.3m in cash and CA$24.5m in receivables that were due within 12 months. So it can boast CA$92.3m more liquid assets than total liabilities.
This excess liquidity is a great indication that AcuityAds Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, AcuityAds Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that AcuityAds Holdings grew its EBIT by 284% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AcuityAds Holdings'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. AcuityAds Holdings 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. Happily for any shareholders, AcuityAds Holdings actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case AcuityAds Holdings has CA$92.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CA$23m, being 244% of its EBIT. The bottom line is that we do not find AcuityAds Holdings's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with AcuityAds Holdings , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.