Niu Technologies (NASDAQ:NIU) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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?

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. 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. 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.

View our latest analysis for Niu Technologies

How Much Debt Does Niu Technologies Carry?

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.

A Look At Niu Technologies' Liabilities

We can see from the most recent balance sheet that Niu Technologies had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥50.5m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥63.8m in receivables that were due within 12 months. So it actually has 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.

On top of that, Niu Technologies grew its EBIT by 58% 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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 it is always sensible to investigate a company's debt, in this case Niu Technologies has CN¥1.39b in net cash and a decent-looking balance sheet. 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. 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. Be aware that Niu Technologies is showing 2 warning signs in our investment analysis , you should know about...

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.

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

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.