Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ACV Auctions Inc. (NASDAQ:ACVA) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 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, 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.
What Is ACV Auctions's Net Debt?
As you can see below, at the end of March 2024, ACV Auctions had US$125.0m of debt, up from US$95.5m a year ago. Click the image for more detail. 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
According to the last reported balance sheet, ACV Auctions had liabilities of US$430.1m due within 12 months, and liabilities of US$156.3m due beyond 12 months. On the other hand, it had cash of US$341.5m and US$340.4m worth of receivables due within a year. So it can boast US$95.5m more liquid assets than total liabilities.
This short term liquidity is a sign that ACV Auctions could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ACV Auctions boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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?
Statistically speaking companies that lose money are riskier than those that make money. 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$49m and booked a US$78m accounting loss. 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. 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. We've identified 2 warning signs with ACV Auctions , and understanding them should be part of your investment process.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.