Li Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger, has stated clearly that “the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” When we think about how risky a company is, we always look at its use of debt, because too much debt can lead to ruin. Like many other companies, NVIDIA Corporation (NASDAQ:NVDA) does use debt, but is this debt a concern to shareholders?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either through recapitalization or with its own cash flow. In the worst case scenario, it may be unable to pay its creditors and go bankrupt. However, a more common (but still costly) occurrence is when a company has to issue shares at a bargain price, permanently diluting shareholder wealth, just to shore up its balance sheet. Of course, debt can be an important tool for companies, particularly capital heavily-capitalized companies. When examining debt levels, we first consider both cash and debt levels.
View our latest analysis for NVIDIA
How much debt does NVIDIA have?
As you can see below, NVIDIA has $9.71 billion in debt as of April 2024, down from $11 billion a year ago. However, it has $31.4 billion in cash offsetting this, resulting in net cash of $21.7 billion.
How strong is NVIDIA’s balance sheet?
Zooming in on the latest balance sheet data, we can see that NVIDIA had $15.2bn due within 12 months and $12.7bn due beyond that. Offsetting these debts, it had cash of $31.4bn and $12.4bn in receivables due within 12 months. This means that NVIDIA has a whopping $15.9bn in liquid assets. total liabilities.
Considering NVIDIA’s size, the company’s liquid assets appear to be well balanced with its total liabilities. So, while it’s highly unlikely that a company with a market cap of $2.86 trillion would ever run out of cash, it’s still worth keeping an eye on the balance sheet. Simply put, it’s fair to say that NVIDIA is not heavy on debt, as it boasts net cash.
Even more impressive is the fact that NVIDIA grew its EBIT by 956% over the last twelve months, an increase that will make it even easier to pay down its debt going forward. The balance sheet is arguably where we learn most about debt, but whether NVIDIA can maintain a healthy balance sheet going forward will depend more on future earnings than anything else. So if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.
But a final consideration is also important, because a company can’t pay down debt with paper profits. It needs cash. NVIDIA may have net cash on its balance sheet, but it’s still interesting to look at how well the company converts its earnings before interest and taxes (EBIT) to free cash flow, because that influences both its need for debt and its ability to manage it. Over the past three years, NVIDIA has recorded free cash flow equal to 82% of its EBIT, a higher figure than would typically be expected. This puts the company in a very good position to pay down its debt.
summary
While investors may be concerned about debt, it’s important to remember that NVIDIA has $21.7 billion in net cash, meaning that its liquid assets outweigh its liabilities. Even better, 82% of its EBIT was converted into free cash flow, driving $39 billion in profits. So is NVIDIA’s debt a risk? We don’t think so. When analyzing debt levels, the balance sheet is the obvious starting point. But not all investment risk lies on the balance sheet – far from it. For example, NVIDIA has 1. Warning Signs I think you should know.
After all, sometimes it’s easier to focus on companies that don’t need debt. Readers can access our list of growth stocks with zero net debt. 100% Freeright now.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
