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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Nova Ltd. (NASDAQ:NVMI) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nova

What Is Nova's Net Debt?

The chart below, which you can click on for greater detail, shows that Nova had US$198.6m in debt in September 2024; about the same as the year before. But on the other hand it also has US$601.1m in cash, leading to a US$402.5m net cash position.

A Look At Nova's Liabilities

We can see from the most recent balance sheet that Nova had liabilities of US$367.6m falling due within a year, and liabilities of US$58.6m due beyond that. Offsetting this, it had US$601.1m in cash and US$114.4m in receivables that were due within 12 months. So it can boast US$289.4m more liquid assets than total liabilities.

This surplus suggests that Nova has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nova boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Nova grew its EBIT by 20% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nova's ability to maintain a healthy balance sheet going forward. 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 Nova 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, Nova 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 Nova has net cash of US$402.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in US$180m. 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, 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.