NVIDIA (NASDAQ:NVDA) Seems To Use Debt Rather Sparingly (2024)

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.' 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. As with many other companies NVIDIA Corporation (NASDAQ:NVDA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NVIDIA

How Much Debt Does NVIDIA Carry?

You can click the graphic below for the historical numbers, but it shows that NVIDIA had US$9.71b of debt in January 2024, down from US$11.0b, one year before. However, it does have US$26.0b in cash offsetting this, leading to net cash of US$16.3b.

How Strong Is NVIDIA's Balance Sheet?

According to the last reported balance sheet, NVIDIA had liabilities of US$10.6b due within 12 months, and liabilities of US$12.1b due beyond 12 months. Offsetting this, it had US$26.0b in cash and US$10.00b in receivables that were due within 12 months. So it actually has US$13.2b 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$1.95t 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!

Better yet, NVIDIA grew its EBIT by 489% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NVIDIA'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NVIDIA 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, NVIDIA generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd 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 NVIDIA has net cash of US$16.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$27b. So is NVIDIA's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with NVIDIA .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.