Stock Analysis
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. 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?
What Risk Does Debt Bring?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See 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. However, it does have US$13.1b in cash offsetting this, leading to net cash of US$2.19b.
How Strong Is NVIDIA's Balance Sheet?
The latest balance sheet data shows that NVIDIA had liabilities of US$6.86b due within a year, and liabilities of US$12.3b falling due after that. Offsetting this, it had US$13.1b in cash and US$4.91b in receivables that were due within 12 months. 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 it's very unlikely that the US$393.8b company is short on cash, but still worth keeping an eye on the 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.
But the bad news is that NVIDIA has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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. Over the last three years, NVIDIA recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that NVIDIA has US$2.19b in net cash. And it impressed us with free cash flow of US$4.8b, being 81% of its EBIT. So we don't have any problem with NVIDIA's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for NVIDIA 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.
What are the risks and opportunities for NVIDIA?
NVIDIA Corporation provides graphics, and compute and networking solutions in the United States, Taiwan, China, and internationally.
Rewards
Earnings are forecast to grow 30.99% per year
Earnings grew by 33.1% over the past year
Risks
Significant insider selling over the past 3 months
Further research on
NVIDIA
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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.
About NasdaqGS:NVDA
NVIDIA
NVIDIA Corporation provides graphics, and compute and networking solutions in the United States, Taiwan, China, and internationally.
Exceptional growth potential with outstanding track record.
