We Think NVIDIA (NASDAQ:NVDA) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, NVIDIA Corporation (NASDAQ:NVDA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NVIDIA

What Is NVIDIA's Debt?

The image below, which you can click on for greater detail, shows that NVIDIA had debt of US$9.71b at the end of July 2023, a reduction from US$10.9b over a year. But on the other hand it also has US$16.0b in cash, leading to a US$6.32b net cash position.

A Look At NVIDIA's Liabilities

The latest balance sheet data shows that NVIDIA had liabilities of US$10.3b due within a year, and liabilities of US$11.7b falling due after that. Offsetting this, it had US$16.0b in cash and US$7.07b in receivables that were due within 12 months. So it actually has US$1.04b more liquid assets than total liabilities.

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$1.20t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, NVIDIA boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that NVIDIA grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NVIDIA 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NVIDIA has net cash of US$6.32b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$10b, being 85% of its EBIT. So is NVIDIA's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for NVIDIA 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.