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NIO’s (NYSE:NIO) Debt and the Risks involved

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This article was originally published on Simply Wall St News .

As most investors involved in the Electrical Vehicle market already know, NIO Inc. ( NYSE:NIO ) is jointly producing EVs and selling in China with plans to expand internationally.

NIO has research & development offices in the San Jose - USA, an engineering team in Oxford - United Kingdom and a design center in Munich - Germany. They also have a partnership with Mobileye N.V. for the development of automated and autonomous vehicles for consumer markets.

Their production partner is Jianghuai Automobile Group Co, with which NIO has entered a definitive agreement to establish a joint venture for manufacturing management and operations with a registered capital of RMB500 million where NIO holds 49% equity interests.

NIO is a young growth company, and as all younger companies it carries with it a certain amount of risk. In order to have a better picture of the risks, we will examine one aspect of them - Debt.

Debt is an important fixed-cost used to fund operations and increases the growth of a company when goods are in demand and market conditions are favorable.

On the flip side, debt exacerbates company risk when times are bad, and sometimes can spiral out of control.

Usually, debt financing is available and recommended for mature companies with reliable cash flows, and should be undertaken with caution for younger companies.

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.” It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses.

How Much Debt Does NIO Carry?

The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

You can click the graphic below for the historical numbers, but it shows that as of March 2021 NIO had CN¥13.9b of debt, an increase on CN¥11.5b, over one year. But it also has CN¥47.2b in cash to offset that, meaning it has CN¥33.4b net cash.

See our latest analysis for NIO

NYSE:NIO Debt to Equity History, June 2021

What about NIO's Balance Sheet?

According to the last reported balance sheet, NIO had liabilities of CN¥17.0b due within 12 months, and liabilities of CN¥13.6b due beyond 12 months. On the other hand, it had cash of CN¥47.2b and CN¥1.68b worth of receivables due within a year. So it actually has CN¥18.2b more liquid assets than total liabilities.

This short term liquidity is a sign that NIO could probably pay off its debt with ease, as its balance sheet is far from stretched.

You can clearly see NIO's balance sheet structure in the graph below.

NYSE:NIO Short and Long term Assets v.s. Liabilities, June 2021

Succinctly put, NIO boasts net cash, so it's fair to say it does not have a heavy debt load!

In the last year NIO wasn't profitable at an EBIT level, but managed to grow its revenue by 202%, to CN¥23b. That is a sign that NIO is well within the high-growth phase of its operations.

Key Takeaways

Even though NIO is a relatively young company, it seems to be able to take on and manage debt well. Debt is covered by cash, and long term expectations of revenue growth give hope that the company is able to expand operations without much risk.

On the other hand, we should be aware that cash burns fast while debt has a tendency to grow. This is where the future estimates of NIO’s potential come into play.

If investors find that the company has a solid potential to expand both revenues and capital expenditures required for growth, then they are dealing with a healthy company moving forward.

We can see that while NIO lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥823m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash.

We think its revenue growth of 202% is a great sign. There's no doubt fast top line growth can give a company more flexibility for establishing future operations.

Investors should also keep in mind that NIO is engaged in a capital-intense industry with aggressive competition from older established companies, such as: Volkswagen ( XTRA:VOW3 ), Daimler ( XTRA:DAI ), Toyota Motor ( TSE:7203 ), smaller local competitors such as XPeng ( NYSE:XPEV ), and innovators like Tesla ( NASDAQ:TSLA ).

As we can see, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NIO you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com