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. Importantly, Niu Technologies (NASDAQ:NIU) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Niu Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that Niu Technologies had CN¥180.0m of debt in March 2021, down from CN¥188.9m, one year before. But it also has CN¥949.6m in cash to offset that, meaning it has CN¥769.6m net cash.
How Strong Is Niu Technologies’ Balance Sheet?
According to the last reported balance sheet, Niu Technologies had liabilities of CN¥816.8m due within 12 months, and liabilities of CN¥50.8m due beyond 12 months. Offsetting this, it had CN¥949.6m in cash and CN¥42.6m in receivables that were due within 12 months. So it actually has CN¥124.6m more liquid assets than total liabilities.
Having regard to Niu Technologies’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the CN¥12.8b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Niu Technologies boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, Niu Technologies grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Niu Technologies’s ability to maintain a healthy balance sheet going forward.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Niu Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Niu Technologies actually produced more free cash flow than EBIT over the last two years. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Summing up
While it is always sensible to investigate a company’s debt, in this case Niu Technologies has CN¥769.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥314m, being 121% of its EBIT. So we don’t think Niu Technologies’s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it.