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.' 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. We can see that NV5 Global, Inc. (NASDAQ:NVEE) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is NV5 Global's Net Debt?
The image below, which you can click on for greater detail, shows that NV5 Global had debt of US$49.4m at the end of March 2019, a reduction from US$71.4m over a year. On the flip side, it has US$45.8m in cash leading to net debt of about US$3.55m.
How Healthy Is NV5 Global's Balance Sheet?
The latest balance sheet data shows that NV5 Global had liabilities of US$73.0m due within a year, and liabilities of US$77.6m falling due after that. Offsetting this, it had US$45.8m in cash and US$133.9m in receivables that were due within 12 months. So it actually has US$29.2m more liquid assets than total liabilities.
This short term liquidity is a sign that NV5 Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, NV5 Global has a very light debt load indeed.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
With debt at a measly 0.061 times EBITDA and EBIT covering interest a whopping 22.6 times, it's clear that NV5 Global is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. Also positive, NV5 Global grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 NV5 Global 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. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, NV5 Global recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
NV5 Global's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks NV5 Global has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. Another factor that would give us confidence in NV5 Global would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
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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