Is AcuityAds Holdings (TSE:AT) Using Debt In A Risky Way?

Warren Buffett famously said, '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. Importantly, AcuityAds Holdings Inc. (TSE:AT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AcuityAds Holdings

How Much Debt Does AcuityAds Holdings Carry?

As you can see below, AcuityAds Holdings had CA$5.01m of debt at September 2022, down from CA$7.83m a year prior. However, it does have CA$88.2m in cash offsetting this, leading to net cash of CA$83.2m.

How Healthy Is AcuityAds Holdings' Balance Sheet?

We can see from the most recent balance sheet that AcuityAds Holdings had liabilities of CA$27.4m falling due within a year, and liabilities of CA$4.58m due beyond that. On the other hand, it had cash of CA$88.2m and CA$28.4m worth of receivables due within a year. So it can boast CA$84.7m more liquid assets than total liabilities.

This surplus liquidity suggests that AcuityAds Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that AcuityAds Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AcuityAds Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year AcuityAds Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.0%, to CA$118m. That's not what we would hope to see.

So How Risky Is AcuityAds Holdings?

While AcuityAds Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CA$1.7m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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 AcuityAds Holdings has 3 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need 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 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.