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.<\/strong> (NASDAQ:NVEE<\/a>) does use debt in its business. But the more important question is: how much risk is that debt creating? <\/p>\n 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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together. <\/p>\n View our latest analysis for NV5 Global <\/a><\/span><\/p>\n As you can see below, NV5 Global had US$79.4m of debt at October 2022, down from US$165.0m a year prior. However, because it has a cash reserve of US$54.2m, its net debt is less, at about US$25.3m. <\/p>\n We can see from the most recent balance sheet that NV5 Global had liabilities of US$163.9m falling due within a year, and liabilities of US$115.9m due beyond that. Offsetting these obligations, it had cash of US$54.2m as well as receivables valued at US$239.4m due within 12 months. So it can boast US$13.8m more liquid assets than total<\/em> liabilities. <\/p>\n Having regard to NV5 Global’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$2.03b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, NV5 Global has virtually no net debt, so it’s fair to say it does not have a heavy debt load! <\/p>\n We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it. <\/p>\n NV5 Global’s net debt is only 0.20 times its EBITDA. And its EBIT covers its interest expense a whopping 21.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we’re happy to report that NV5 Global has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NV5 Global 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<\/a> to be interesting. <\/p>\n Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, NV5 Global actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit. <\/p>\n 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. For investing nerds like us its balance sheet is almost charming. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign <\/strong> we’ve spotted with NV5 Global<\/a> . <\/p>\n If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free<\/strong> list of growing businesses that have net cash on the balance sheet<\/a>. <\/p>\n What are the risks and opportunities for NV5 Global?<\/p>\n What Risk Does Debt Bring? <\/h2>\n
What Is NV5 Global’s Debt? <\/h2>\n
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How Strong Is NV5 Global’s Balance Sheet? <\/h2>\n
Our View<\/h2>\n