Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, ACV Auctions Inc. (NASDAQ:ACVA) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ACV Auctions Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 ACV Auctions had US$115.0m of debt, an increase on US$105.0m, over one year. But it also has US$287.8m in cash to offset that, meaning it has US$172.8m net cash.
How Strong Is ACV Auctions' Balance Sheet?
We can see from the most recent balance sheet that ACV Auctions had liabilities of US$422.2m falling due within a year, and liabilities of US$155.9m due beyond that. On the other hand, it had cash of US$287.8m and US$334.5m worth of receivables due within a year. So it can boast US$44.1m more liquid assets than total liabilities.
This state of affairs indicates that ACV Auctions' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$3.47b company is short on cash, but still worth keeping an eye on the balance sheet. 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 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$596m, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is ACV Auctions?
Although ACV Auctions had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$8.5m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 29% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
