David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. We note that NVIDIA Corporation (NASDAQ:NVDA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for NVIDIA
What Is NVIDIA’s Net Debt?
As you can see below, NVIDIA had US$11.0b of debt, at October 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$13.1b in cash to offset that, meaning it has US$2.19b net cash.
How Strong Is NVIDIA’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NVIDIA had liabilities of US$6.86b due within 12 months and liabilities of US$12.3b due beyond that. On the other hand, it had cash of US$13.1b and US$4.91b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.09b.
Having regard to NVIDIA’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$523.3b company is struggling for cash, we still think it’s worth monitoring its balance sheet. While it does have liabilities worth noting, NVIDIA also has more cash than debt, so we’re pretty confident it can manage its debt safely.
On the other hand, NVIDIA’s EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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’re focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NVIDIA 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. During the last three years, NVIDIA generated free cash flow amounting to a very robust 81% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
Summing Up
We could understand if investors are concerned about NVIDIA’s liabilities, but we can be reassured by the fact it has has net cash of US$2.19b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$4.8b. So we are not troubled with NVIDIA’s debt use. 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 – NVIDIA has 3 warning signs we think you should be aware of.
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.
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