Is NIO (NYSE:NIO) a risky investment?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that NIO inc. (NYSE:NIO) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for NIO
What is NIO’s debt?
You can click on the graph below for historical figures, but it shows that as of December 2021, NIO had a debt of 17.0 billion Canadian yen, an increase from 7.87 billion domestic yen, on a year. However, he has 52.5 billion Canadian yen in cash to offset this, resulting in net cash of 35.4 billion Canadian yen.
A Look at NIO’s Responsibilities
The latest balance sheet data shows that NIO had liabilities of 29.2 billion yen maturing within one year, and liabilities of 15.6 billion yen maturing thereafter. In return, he had 52.5 billion yen in cash and 4.84 billion yen in debt due within 12 months. He can therefore boast of having 12.5 billion yen more in liquid assets than total Passives.
This short-term liquidity is a sign that NIO could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that NIO has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether NIO can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, NIO was not profitable in terms of EBIT, but managed to increase its turnover by 122%, to 36 billion yen. Its fairly obvious shareholders therefore hope for more growth!
So how risky is NIO?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, NIO has lost money in earnings before interest and taxes (EBIT). Indeed, during this period, he spent 2.1 billion Canadian yen of cash and suffered a loss of 11 billion Canadian yen. Given that it only has net cash of 35.4 billion Canadian yen, the company may need to raise more capital if it does not break even soon. Importantly, NIO’s revenue growth is hot at a trot. High-growth, for-profit businesses may well be risky, but they can also offer great rewards. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 1 warning sign for NIO which you should be aware of before investing here.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.