Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 NVIDIA Corporation (NASDAQ:NVDA) makes use of debt. But should shareholders be worried about its use of debt?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for NVIDIA
The image below, which you can click on for greater detail, shows that NVIDIA had debt of US$8.46b at the end of July 2024, a reduction from US$9.71b over a year. But on the other hand it also has US$34.8b in cash, leading to a US$26.3b net cash position.
Zooming in on the latest balance sheet data, we can see that NVIDIA had liabilities of US$14.0b due within 12 months and liabilities of US$13.1b due beyond that. On the other hand, it had cash of US$34.8b and US$14.1b worth of receivables due within a year. So it actually has US$21.9b more liquid assets than total liabilities.
Having regard to NVIDIA’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$3.60t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that NVIDIA has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that NVIDIA grew its EBIT by 459% over twelve months. That boost will make it even easier to pay down debt going forward. 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 NVIDIA 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NVIDIA may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, NVIDIA recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company’s debt, in this case NVIDIA has US$26.3b in net cash and a decent-looking balance sheet. And we liked the look of last year’s 459% year-on-year EBIT growth. So is NVIDIA’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. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for NVIDIA (of which 1 is potentially serious!) you should know about.
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.
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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.
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