We Think NVR (NYSE:NVR) Can Manage Its Debt With Ease

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.' 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. We can see that NVR, Inc. (NYSE:NVR) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for NVR

What Is NVR's Debt?

The image below, which you can click on for greater detail, shows that NVR had debt of US$914.4m at the end of March 2023, a reduction from US$1.52b over a year. However, its balance sheet shows it holds US$2.79b in cash, so it actually has US$1.87b net cash.

A Look At NVR's Liabilities

Zooming in on the latest balance sheet data, we can see that NVR had liabilities of US$866.6m due within 12 months and liabilities of US$1.36b due beyond that. Offsetting these obligations, it had cash of US$2.79b as well as receivables valued at US$40.8m due within 12 months. So it actually has US$596.8m 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. Simply put, the fact that NVR has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that NVR grew its EBIT at 14% over the last year, further increasing its ability to manage 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, NVR recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NVR has net cash of US$1.87b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.9b, being 80% of its EBIT. So we don't think NVR's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example NVR has 2 warning signs (and 1 which is concerning) we think you should know about.

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.