We Think AcuityAds Holdings (TSE:AT) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AcuityAds Holdings

How Much Debt Does AcuityAds Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that AcuityAds Holdings had CA$7.83m of debt in September 2021, down from CA$12.3m, one year before. However, it does have CA$100.3m in cash offsetting this, leading to net cash of CA$92.5m.

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 these obligations, it had cash of CA$100.3m as well as receivables valued at CA$24.5m due within 12 months. So it actually has 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that AcuityAds Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, AcuityAds Holdings grew its EBIT by 284% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that AcuityAds Holdings has net cash of CA$92.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CA$23m, being 244% of its EBIT. When it comes to AcuityAds Holdings's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 2 warning signs we've spotted with AcuityAds Holdings .

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.