Is Niu Technologies (NASDAQ:NIU) A Risky Investment?

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 can see that Niu Technologies (NASDAQ:NIU) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Niu Technologies

What Is Niu Technologies's Net Debt?

The chart below, which you can click on for greater detail, shows that Niu Technologies had CN¥180.0m in debt in March 2022; about the same as the year before. However, it does have CN¥837.9m in cash offsetting this, leading to net cash of CN¥657.9m.

How Strong Is Niu Technologies' Balance Sheet?

According to the last reported balance sheet, Niu Technologies had liabilities of CN¥970.0m due within 12 months, and liabilities of CN¥43.4m due beyond 12 months. Offsetting this, it had CN¥837.9m in cash and CN¥172.4m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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¥3.82b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Niu Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Niu Technologies has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Niu Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Niu Technologies recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Niu Technologies's liabilities, but we can be reassured by the fact it has has net cash of CN¥657.9m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in CN¥48m. So we don't think Niu Technologies's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Niu Technologies you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.