Does Niu Technologies (NASDAQ:NIU) Have A Healthy Balance Sheet?

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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Niu Technologies

What Is Niu Technologies's Net Debt?

As you can see below, Niu Technologies had CN¥180.0m of debt at September 2020, down from CN¥268.5m a year prior. However, its balance sheet shows it holds CN¥1.30b in cash, so it actually has CN¥1.12b net cash.

How Healthy Is Niu Technologies' Balance Sheet?

We can see from the most recent balance sheet that Niu Technologies had liabilities of CN¥1.00b falling due within a year, and liabilities of CN¥31.9m due beyond that. Offsetting this, it had CN¥1.30b in cash and CN¥38.7m in receivables that were due within 12 months. So it can boast CN¥305.3m 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 it's very unlikely that the CN¥21.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Niu Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Niu Technologies grew its EBIT by 123% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Niu Technologies 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 to be interesting.

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. Over the last two years, Niu Technologies reported free cash flow worth 7.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Niu Technologies has CN¥1.12b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 123% over the last year. So is Niu Technologies's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Niu Technologies that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.
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