Acuity Brands (NYSE:AYI) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Acuity Brands, Inc. (NYSE:AYI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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.

View our latest analysis for Acuity Brands

What Is Acuity Brands's Net Debt?

As you can see below, Acuity Brands had US$496.0m of debt, at May 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$699.0m in cash offsetting this, leading to net cash of US$203.0m.

How Healthy Is Acuity Brands' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Acuity Brands had liabilities of US$605.3m due within 12 months and liabilities of US$782.9m due beyond that. On the other hand, it had cash of US$699.0m and US$512.3m worth of receivables due within a year. So its liabilities total US$176.9m more than the combination of its cash and short-term receivables.

Given Acuity Brands has a market capitalization of US$7.37b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Acuity Brands boasts net cash, so it's fair to say it does not have a heavy debt load!

Acuity Brands's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Acuity Brands's ability to maintain a healthy balance sheet going forward. 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. Acuity Brands 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 three years, Acuity Brands recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Acuity Brands's liabilities, but we can be reassured by the fact it has has net cash of US$203.0m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$492m. So we don't think Acuity Brands's use of debt is risky. We'd be very excited to see if Acuity Brands insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.