Niu Technologies (NASDAQ:NIU) Seems To Use Debt Rather Sparingly
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Niu Technologies (NASDAQ:NIU) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Niu Technologies
What Is Niu Technologies's Debt?
As you can see below, Niu Technologies had CN¥140.0m of debt at September 2021, down from CN¥180.0m a year prior. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥1.39b net cash.
How Strong Is Niu Technologies' Balance Sheet?
The latest balance sheet data shows that Niu Technologies had liabilities of CN¥1.34b due within a year, and liabilities of CN¥50.5m falling due after that. Offsetting this, it had CN¥1.53b in cash and CN¥63.8m in receivables that were due within 12 months. So it can boast CN¥203.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Niu Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Niu Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Niu Technologies has boosted its EBIT by 58%, 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 Niu Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Niu Technologies 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. Looking at the most recent three years, Niu Technologies recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Niu Technologies has net cash of CN¥1.39b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 58% over the last year. So we don't think Niu Technologies's use of debt is risky. 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. Be aware that Niu Technologies is showing 2 warning signs in our investment analysis , 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.
