Is Nova (NASDAQ:NVMI) Using Too Much Debt?
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Nova Ltd. (NASDAQ:NVMI) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Nova
How Much Debt Does Nova Carry?
The image below, which you can click on for greater detail, shows that at March 2022 Nova had debt of US$195.4m, up from US$179.8m in one year. But it also has US$340.9m in cash to offset that, meaning it has US$145.5m net cash.
How Healthy Is Nova's Balance Sheet?
The latest balance sheet data shows that Nova had liabilities of US$311.7m due within a year, and liabilities of US$71.7m falling due after that. On the other hand, it had cash of US$340.9m and US$78.0m worth of receivables due within a year. So it can boast US$35.5m more liquid assets than total liabilities.
Having regard to Nova's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$2.68b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Nova has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Nova grew its EBIT by 114% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept 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 82% 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 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. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in US$104m. 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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