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We Think NVIDIA (NASDAQ:NVDA) Can Stay On Top Of Its Debt
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.' 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 note that NVIDIA Corporation (NASDAQ:NVDA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for NVIDIA
How Much Debt Does NVIDIA Carry?
As you can see below, NVIDIA had US$11.0b of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$15.3b in cash, leading to a US$4.37b net cash position.
How Strong Is NVIDIA's Balance Sheet?
We can see from the most recent balance sheet that NVIDIA had liabilities of US$7.26b falling due within a year, and liabilities of US$12.7b due beyond that. On the other hand, it had cash of US$15.3b and US$4.08b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$540.0m.
This state of affairs indicates that NVIDIA's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.16t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, NVIDIA boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact NVIDIA's saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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. 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 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
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$4.37b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in US$5.1b. So we don't have any problem with NVIDIA's use of debt. 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. We've identified 2 warning signs with NVIDIA , and understanding them should be part of your investment process.
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.
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.
