Over the past few weeks I have been watching the developments of the technology industry and one company I think is very interesting to analyze is Nvidia Corporation (NASDAQ:NVDA). As the top supplier of computer graphics processing units (GPU's), the company must constantly focus on product innovation and expansion in order to win the supremacy battle of Advanced Micro Devices. With Intel and AMD advancing in the production of on-chip graphic processors, this company will have to diversify its product stream outside the computer graphics world in order to survive in the fast-paced market.
While there are many different factors to look at and consider when investing, in the article below I will analyze Nvidia Corporation's total debt, total liabilities, debt ratios and what analyst and other top investors believe about this company. From this analysis we should get an idea if the company is highly leveraged and how much to expect in return for investing in this company over the long term.
It is essential to remark that gaining knowledge about Nvidia Corporation's debt and liabilities is a key component in understanding the risk of investing in this company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. By studying the debt part of Nvidia Corporation, the investor will know if the firm is able to keep its capital and use it for growth in the future.
Debt ratio = Total Liabilities / Total Assets
The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged and could be in danger if creditors start to demand repayment of debt.
When looking at Nvidia Corporation's total liabilities to total assets ratio over the past three years, we can see that it has, in fact, diminished from 0.29 to 0.25. I usually like to see the debt side of a company's balance sheet shrink. In addition, the fact that the 2013 TTM ratio is below the 0.50 mark, indicates that this company has not financed most of its assets through debt, which is a good signal.
Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio also indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
Compared with 2011, Nvidia Corporation's debt-to-equity ratio has decreased. The figure contracted from 0.41 in 2011 to 0.33 in 2013, rewarding the company with a much cleaner or less risky balance sheet. As the company´s ratio for 2013 stands at 0.33, the risk for the company is quite low. In addition, this figure implies that shareholders have invested less than suppliers, lenders, creditors and obligators.
When looking at a company's debt levels, it's essential to know what future developments will surge from it, and if these will newly boost revenue and cash flow margins. In Nvidia's case, it's the Tegra product line, comprised of processors with advanced graphic capabilities for mobile devices. The Tegra products, along with other new gadgets like the portable gaming device SHIELD, and the cloud-gaming server GRID, are expected to bump growth figures over the next few years.
In terms of debt, it is likely that the company's recent $367 million acquisition of baseband processor firm, Icera, contributed to the higher-than-usual levels. However, the purchase will surely compliment the company's recent expansion into the fast-growing smartphone and tablet market, resulting in future profits for investors.
Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells investors the extent to which the company is using its equity to support operations and growth, thereby helping in the assessment of risk. Companies with a high capitalization ratio are considered to be risky: if they fail to repay their debt on time, jeopardy of insolvency increase, and these companies may also find it difficult to get more loans in the future.
Nvidia's capitalization ratio has decreased over the past two year time span, from 0.007 in 2011, to 0.004 in 2013. This decrease shows us that an investment in the technology firm now will be less riskier than it was two years ago, which is overall positive.
Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. It provides an indication of a firm's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt and consequently weather rough economic conditions. Moreover, the ratio currently stands above 1x, which implies that the company has the ability to cover its total debt with its yearly cash flow from operations.
I feel encouraged by the fact that Jim Simons and John Hussman bought the stock in the past months at an average price of $15.38, because it shows that hedge funds have confidence in the stock. Moreover, they have perceived a substantial upside since their acquisitions.
Currently, many analysts have a good outlook for Nvidia Corporation. Analysts at Yahoo! Finance expect the technology firm to retrieve EPS of $0.71 for the current year and an EPS of $0.84 for the next fiscal year. Revenues are estimated to be at $4.13B million for FY 2014 and $4.42B million for FY 2015. On Feb. 13th, B. Riley gave Nvidia Corporation a rating of "Buy" with a target price of $21, which implies significant upside potential from this point.
With positive metrics in most areas of Nvidia's business, I can conclude that the company still has a bright future to look forward to. Apart from the company's debt situation, I also believe that high returns on invested capital are a bonus for every shareholder and in this case, the 100.10% annual return seems exceedingly optimistic when compared to the industry's average of 5.30%. Moreover, the outstanding annual EBITDA growth of 98.10% and the on-average (in relation to its industry) stock trading price of 23.2x trailing earnings should be more than convincing arguments for investors seeking to gain profits. Other options in the industry, like ARM Holdings PLC (NASDAQ:ARMH), trade at much higher valuations and look like less attractive investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.