We Think Nova (NASDAQ:NVMI) Can Manage Its Debt With Ease

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.' 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 Nova

What Is Nova's Net Debt?

As you can see below, at the end of March 2022, Nova had US$195.4m of debt, up from US$179.8m a year ago. Click the image for more detail. However, it does have US$340.9m in cash offsetting this, leading to net cash of US$145.5m.

How Healthy Is Nova's Balance Sheet?

According to the last reported balance sheet, Nova had liabilities of US$311.7m due within 12 months, and liabilities of US$71.7m due beyond 12 months. Offsetting these obligations, it had cash of US$340.9m as well as receivables valued at US$78.0m due within 12 months. So it actually has US$35.5m more liquid assets than total liabilities.

This state of affairs indicates that Nova'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$2.75b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Nova boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nova grew its EBIT by 114% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Nova generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Nova has US$145.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$104m, being 82% of its EBIT. So we don't think Nova's use of debt is risky. 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.