Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, ACV Auctions Inc. (NASDAQ:ACVA) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ACV Auctions's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 ACV Auctions had debt of US$110.0m, up from US$105.0m in one year. But on the other hand it also has US$272.6m in cash, leading to a US$162.6m net cash position.

A Look At ACV Auctions' Liabilities

We can see from the most recent balance sheet that ACV Auctions had liabilities of US$412.1m falling due within a year, and liabilities of US$141.1m due beyond that. On the other hand, it had cash of US$272.6m and US$329.5m worth of receivables due within a year. So it can boast US$48.9m 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$2.96b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ACV Auctions boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ACV Auctions'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.

In the last year ACV Auctions wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$544m. With any luck the company will be able to grow its way to profitability.

So How Risky Is ACV Auctions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that ACV Auctions had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$26m of cash and made a loss of US$79m. But the saving grace is the US$162.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, ACV Auctions may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with ACV Auctions .

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.

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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.