These 4 Measures Indicate That AcuityAds Holdings (TSE:AT) Is Using Debt Reasonably Well
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. We note that AcuityAds Holdings Inc. (TSE:AT) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 AcuityAds Holdings
What Is AcuityAds Holdings's Debt?
The image below, which you can click on for greater detail, shows that AcuityAds Holdings had debt of CA$10.3m at the end of December 2020, a reduction from CA$21.3m over a year. But it also has CA$22.6m in cash to offset that, meaning it has CA$12.4m net cash.
A Look At AcuityAds Holdings' Liabilities
According to the last reported balance sheet, AcuityAds Holdings had liabilities of CA$29.7m due within 12 months, and liabilities of CA$10.7m due beyond 12 months. On the other hand, it had cash of CA$22.6m and CA$31.9m worth of receivables due within a year. So it actually has CA$14.1m more liquid assets than total liabilities.
Having regard to AcuityAds Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$1.18b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that AcuityAds Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, AcuityAds Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of CA$7.0m in the last twelve months. 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. While AcuityAds Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, AcuityAds Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that AcuityAds Holdings has net cash of CA$12.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 200% of that EBIT to free cash flow, bringing in CA$14m. So is AcuityAds Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for AcuityAds Holdings that you should be aware of before investing here.
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.
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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