Does NVR (NYSE:NVR) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, NVR, Inc. (NYSE:NVR) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NVR

How Much Debt Does NVR Carry?

The chart below, which you can click on for greater detail, shows that NVR had US$914.0m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds US$2.68b in cash, so it actually has US$1.76b net cash.

A Look At NVR's Liabilities

We can see from the most recent balance sheet that NVR had liabilities of US$713.1m falling due within a year, and liabilities of US$1.40b due beyond that. Offsetting these obligations, it had cash of US$2.68b as well as receivables valued at US$48.8m due within 12 months. So it can boast US$614.0m more liquid assets than total liabilities.

This surplus suggests that NVR has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, NVR boasts net cash, so it's fair to say it does not have a heavy debt load!

NVR's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 NVR 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While NVR 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, NVR produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NVR has net cash of US$1.76b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.7b, being 71% of its EBIT. So we don't think NVR's use of debt is risky. 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, we've discovered 2 warning signs for NVR (1 is potentially serious!) that you should be aware of before investing here.

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.

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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.