Is Acacia Research (NASDAQ:ACTG) A Risky Investment?

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.' 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 Acacia Research Corporation (NASDAQ:ACTG) makes use of debt. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Acacia Research

How Much Debt Does Acacia Research Carry?

As you can see below, at the end of September 2020, Acacia Research had US$113.9m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$303.0m in cash, leading to a US$189.1m net cash position.

A Look At Acacia Research's Liabilities

We can see from the most recent balance sheet that Acacia Research had liabilities of US$138.3m falling due within a year, and liabilities of US$50.1m due beyond that. Offsetting these obligations, it had cash of US$303.0m as well as receivables valued at US$263.0k due within 12 months. So it actually has US$114.9m more liquid assets than total liabilities.

This surplus strongly suggests that Acacia Research has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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 Acacia Research has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Acacia Research'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.

In the last year Acacia Research had a loss before interest and tax, and actually shrunk its revenue by 56%, to US$26m. To be frank that doesn't bode well.

So How Risky Is Acacia Research?

Although Acacia Research had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$25m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Acacia Research (of which 3 are a bit unpleasant!) 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. 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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