After a breakthrough in 2020, NIO Inc.(NYSE: NIO)hit the roadblock in 2021, with periods of extreme volatility – typical for a high growth stock in a dynamic environment.
While the EV market has been like a tide, lifting everything in the path, eventually, that tide will have to go out. Only then, as Warren Buffett famously said, we will discover who's been swimming naked.
Third-quarter 2021 results
- Revenue: CN¥9.81b (up 117% from 3Q 2020)
- Net loss: CN¥2.86b (loss widened 141% from 3Q 2020)
The company reported a decent third-quarter result with improved revenues, although losses increased and control over costs was weaker.
Over the last 3 years, on average, earnings per share have increased by 129% per year, but its share price has only increased by 79% per year, which means it is significantly lagging earnings growth.
Furthermore, although margins decreased by around 2.3%, the management already warned about it in the previous report, quoting an increase in tooling depreciation cost.
However, Q4 guidelines were not very optimistic. Here are the highlights.
- Revenue: CN¥9.37b to CN¥10.10b
- Deliveries: 23,500 to 25,500 vehicles
Even though NIO extended the manufacturing agreement to 240,000 units per year, the company is now guiding not even half (30,000) of the quarterly production capacity for the deliveries. There is more than one explanation for this situation – from supply chain issues to chip shortages.
A Look Into NIO's Debt
As you can see below, at the end of September 2021, NIO had CN¥16.7b of debt, up from CN¥8.16b a year ago. Click the image for more detail.
However, it does have CN¥43.3b in cash, offsetting this, leading to net cash of CN¥26.6b.
How Healthy Is NIO's Balance Sheet?
The latest balance sheet data shows that NIO had liabilities of CN¥26.6b due within a year and liabilities of CN¥14.7b falling due after that. Offsetting this, it had CN¥43.3b in cash and CN¥4.33b in receivables that were due within 12 months. So it can boast CN¥6.35b more liquid assets than total liabilities.
Regarding NIO's size, it seems that its liquid assets are well balanced with its total liabilities. So it's doubtful that the CN¥442.0b company is short on cash but still worth keeping an eye on the balance sheet. Since NIO boasts net cash, it's fair to say it does not have a heavy debt load.
When analyzing debt levels, the balance sheet is the prominent place to start. But ultimately, the future profitability of the business will decide if NIO 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.
Last year, NIO wasn't profitable at an EBIT level but managed to grow its revenue by 164%, to CN¥33b.
How Risky Is NIO?
Although NIO had earnings before interest and tax (EBIT) loss over the last twelve months, it generated a positive free cash flow of CN¥2.0b. So taking that at face value and considering the net cash situation, we don't think that the debt risky in the near term. Keeping in mind its 164% revenue growth over the last year, we believe there's a decent chance the company is on track. However, there is a risk of further dilution, as total shares outstanding grew by 20.5% in the past year.
While NIO set a long-term gross margin target of 25%, this ambitious goal is not without its challenges. First of all, we have inflationary pressures, hurting the margins in the EV industry since EVs need at least 20% more copper than internal combustion vehicles. Then, there are shipping issues, with prices quadrupling over the year - posing risks for Chinese exporters.
Ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that NIO is showing 1 warning sign in our investment analysis, you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks today.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article 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.