Yahoo Finance These 4 Measures Indicate That NVR (NYSE:NVR) Is Using Debt Safely
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 NVR, Inc. (NYSE:NVR) does use debt in its business. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for NVR
What Is NVR's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 NVR had US$1.52b of debt, an increase on US$598.1m, over one year. But on the other hand it also has US$2.54b in cash, leading to a US$1.02b net cash position.
How Strong Is NVR's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NVR had liabilities of US$776.1m due within 12 months and liabilities of US$1.80b due beyond that. On the other hand, it had cash of US$2.54b and US$21.5m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that NVR'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$14.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, NVR boasts net cash, so it's fair to say it does not have a heavy debt load!
NVR's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 NVR 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While NVR 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. Over the most recent three years, NVR recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that NVR has US$1.02b in net cash. And it impressed us with free cash flow of US$918m, being 77% of its EBIT. So is NVR's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with NVR , and understanding them should be part of your investment process.
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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
