These 4 Measures Indicate That NVR (NYSE:NVR) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, NVR, Inc. (NYSE:NVR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

Check out our latest analysis for NVR

What Is NVR's Debt?

The chart below, which you can click on for greater detail, shows that NVR had US$911.6m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$2.47b in cash, so it actually has US$1.56b net cash.

How Healthy Is NVR's Balance Sheet?

According to the last reported balance sheet, NVR had liabilities of US$810.3m due within 12 months, and liabilities of US$1.41b due beyond 12 months. Offsetting this, it had US$2.47b in cash and US$35.6m in receivables that were due within 12 months. So it can boast US$292.9m more liquid assets than total liabilities.

Having regard to NVR's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$25.3b company is short on cash, but still worth keeping an eye on the balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NVR's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. NVR 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. During the last three years, NVR produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NVR has net cash of US$1.56b, as well as more liquid assets than liabilities. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in US$1.2b. So is NVR's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in NVR, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.