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. As with many other companies NVIDIA Corporation (NASDAQ:NVDA) makes use of debt. But should shareholders be worried about its use of debt?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for NVIDIA
The image below, which you can click on for greater detail, shows that NVIDIA had debt of US$8.46b at the end of July 2024, a reduction from US$9.71b over a year. But on the other hand it also has US$34.8b in cash, leading to a US$26.3b net cash position.
Zooming in on the latest balance sheet data, we can see that NVIDIA had liabilities of US$14.0b due within 12 months and liabilities of US$13.1b due beyond that. On the other hand, it had cash of US$34.8b and US$14.1b worth of receivables due within a year. So it actually has US$21.9b more liquid assets than total liabilities.
Having regard to NVIDIA’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$3.60t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that NVIDIA has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that NVIDIA grew its EBIT by 459% over twelve months. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
