Is ACV Auctions (NASDAQ:ACVA) Using Debt Sensibly?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ACV Auctions Inc. (NASDAQ:ACVA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ACV Auctions

What Is ACV Auctions's Net Debt?

As you can see below, at the end of December 2023, ACV Auctions had US$115.0m of debt, up from US$75.5m a year ago. Click the image for more detail. However, it does have US$411.3m in cash offsetting this, leading to net cash of US$296.3m.

How Healthy Is ACV Auctions' Balance Sheet?

According to the last reported balance sheet, ACV Auctions had liabilities of US$333.9m due within 12 months, and liabilities of US$132.5m due beyond 12 months. Offsetting these obligations, it had cash of US$411.3m as well as receivables valued at US$283.0m due within 12 months. So it can boast US$228.0m 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. Simply put, the fact that ACV Auctions has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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$481m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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. And over the same period it saw negative free cash outflow of US$46m and booked a US$75m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$296.3m. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that ACV Auctions is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.