Yahoo Finance We Think NVIDIA (NASDAQ:NVDA) Can Manage Its Debt With Ease
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that NVIDIA Corporation (NASDAQ:NVDA) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for NVIDIA
What Is NVIDIA's Net Debt?
As you can see below, at the end of August 2021, NVIDIA had US$11.9b of debt, up from US$6.96b a year ago. Click the image for more detail. But on the other hand it also has US$19.7b in cash, leading to a US$7.71b net cash position.
How Healthy Is NVIDIA's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NVIDIA had liabilities of US$4.45b due within 12 months and liabilities of US$13.1b due beyond that. Offsetting this, it had US$19.7b in cash and US$3.59b in receivables that were due within 12 months. So it actually has US$5.74b 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 while it's hard to imagine that the US$554.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NVIDIA boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that NVIDIA has boosted its EBIT by 96%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 last three years, NVIDIA actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that NVIDIA has net cash of US$7.71b, as well as more liquid assets than liabilities. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in US$6.7b. So is NVIDIA's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that NVIDIA is showing 2 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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