These 4 Measures Indicate That Nova (NASDAQ:NVMI) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Nova Ltd. (NASDAQ:NVMI) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. 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.

What Is Nova's Debt?

The image below, which you can click on for greater detail, shows that Nova had debt of US$180.9m at the end of March 2025, a reduction from US$198.0m over a year. But on the other hand it also has US$541.8m in cash, leading to a US$361.0m net cash position.

How Healthy Is Nova's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nova had liabilities of US$401.8m due within 12 months and liabilities of US$79.9m due beyond that. Offsetting these obligations, it had cash of US$541.8m as well as receivables valued at US$126.9m due within 12 months. So it actually has US$187.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Nova could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nova has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Nova

In addition to that, we're happy to report that Nova has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. 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 Nova 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. Nova 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. Over the last three years, Nova recorded free cash flow worth a fulsome 96% 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 Nova has net cash of US$361.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$221m. So is Nova'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 Nova, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.