Here's Why AcuityAds Holdings (TSE:AT) Can Manage Its Debt Responsibly

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.' 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 AcuityAds Holdings Inc. (TSE:AT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AcuityAds Holdings

What Is AcuityAds Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that AcuityAds Holdings had CA$10.3m of debt in December 2020, down from CA$21.3m, one year before. But on the other hand it also has CA$22.6m in cash, leading to a CA$12.4m net cash position.

A Look At AcuityAds Holdings' Liabilities

The latest balance sheet data shows that AcuityAds Holdings had liabilities of CA$29.7m due within a year, and liabilities of CA$10.7m falling due after that. Offsetting these obligations, it had cash of CA$22.6m as well as receivables valued at CA$31.9m due within 12 months. So it actually has CA$14.1m more liquid assets than total liabilities.

This state of affairs indicates that AcuityAds Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$829.9m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, AcuityAds Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, AcuityAds Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$7.0m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AcuityAds Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last year, AcuityAds Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case AcuityAds Holdings has CA$12.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 259% of that EBIT to free cash flow, bringing in CA$18m. So we don't think AcuityAds Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with AcuityAds Holdings .

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. 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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