AcuityAds Holdings (TSE:AT) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies AcuityAds Holdings Inc. (TSE:AT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AcuityAds Holdings

How Much Debt Does AcuityAds Holdings Carry?

The image below, which you can click on for greater detail, shows that AcuityAds Holdings had debt of CA$8.00m at the end of June 2021, a reduction from CA$17.8m over a year. However, its balance sheet shows it holds CA$93.4m in cash, so it actually has CA$85.4m net cash.

How Strong Is AcuityAds Holdings' Balance Sheet?

We can see from the most recent balance sheet that AcuityAds Holdings had liabilities of CA$26.8m falling due within a year, and liabilities of CA$8.39m due beyond that. Offsetting this, it had CA$93.4m in cash and CA$31.0m in receivables that were due within 12 months. So it actually has CA$89.2m more liquid assets than total liabilities.

This short term liquidity is a sign that AcuityAds Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AcuityAds Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, AcuityAds Holdings grew its EBIT by 1,213% last year, which is an impressive improvement. 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. While AcuityAds Holdings 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. Happily for any shareholders, AcuityAds Holdings actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case AcuityAds Holdings has CA$85.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CA$21m, being 259% of its EBIT. So is AcuityAds Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for AcuityAds Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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