These 4 Measures Indicate That Niu Technologies (NASDAQ:NIU) Is Using Debt Safely

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. Importantly, Niu Technologies (NASDAQ:NIU) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Niu Technologies

How Much Debt Does Niu Technologies Carry?

As you can see below, Niu Technologies had CN¥180.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥1.08b in cash, so it actually has CN¥897.7m net cash.

How Strong Is Niu Technologies' Balance Sheet?

We can see from the most recent balance sheet that Niu Technologies had liabilities of CN¥1.13b falling due within a year, and liabilities of CN¥47.6m due beyond that. On the other hand, it had cash of CN¥1.08b and CN¥268.6m worth of receivables due within a year. So it can boast CN¥169.6m more liquid assets than total liabilities.

This surplus suggests that Niu Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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. During the last three years, Niu Technologies produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Niu Technologies has CN¥897.7m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 48% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Niu Technologies has 2 warning signs we think you should be aware of.

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.