Does ACV Auctions (NASDAQ:ACVA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 ACV Auctions Inc. (NASDAQ:ACVA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for ACV Auctions

How Much Debt Does ACV Auctions Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 ACV Auctions had US$125.0m of debt, an increase on US$95.5m, over one year. However, it does have US$341.5m in cash offsetting this, leading to net cash of US$216.5m.

A Look At ACV Auctions' Liabilities

Zooming in on the latest balance sheet data, we can see that ACV Auctions had liabilities of US$430.1m due within 12 months and liabilities of US$156.3m due beyond that. Offsetting this, it had US$341.5m in cash and US$340.4m in receivables that were due within 12 months. So it actually has US$95.5m more liquid assets than total liabilities.

This surplus suggests that ACV Auctions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ACV Auctions boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ACV Auctions 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.

Over 12 months, ACV Auctions reported revenue of US$507m, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is ACV Auctions?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ACV Auctions lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$49m of cash and made a loss of US$78m. While this does make the company a bit risky, it's important to remember it has net cash of US$216.5m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 ACV Auctions .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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