Does Nova (NASDAQ: NVMI) have a healthy track record?

Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Nova Ltd. (NASDAQ: NVMI) uses debt in its business. But does this debt worry shareholders?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Nova

What is Nova’s net debt?

You can click on the graph below for historical numbers, but it shows that as of September 2021, Nova had a debt of US $ 182.0 million, an increase from none, year over year. But it also has $ 410.0 million in cash to make up for that, which means it has $ 228.0 million in net cash.

Is Nova’s track record healthy?

Zooming in on the latest balance sheet data, we can see that Nova had liabilities of US $ 282.8 million due within 12 months and US $ 44.7 million liabilities beyond. In compensation for these obligations, he had cash of US $ 410.0 million as well as receivables valued at US $ 64.6 million maturing within 12 months. He can therefore avail himself of $ 147.1 million in liquid assets more than total Liabilities.

This surplus suggests that Nova has a prudent balance sheet and could probably eliminate its debt without too much difficulty. Put simply, the fact that Nova has more cash than debt is arguably a good indication that it can safely manage its debt.

On top of that, Nova has increased its EBIT by 87% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether Nova can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Nova may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Nova has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.

In summary

While it is always a good idea to investigate a company’s debt, in this case Nova has US $ 228.0 million in net cash and a decent balance sheet. The icing on the cake was that he converted 103% of that EBIT to free cash flow, bringing in US $ 114 million. So we don’t think Nova’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Nova you must be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.