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 famously said that ‘Volatility is far from synonymous with risk.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that NIO Inc. (NYSE:NIO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 NIO

How Much Debt Does NIO Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 NIO had CN¥17.0b of debt, an increase on CN¥7.87b, over one year. However, it does have CN¥52.5b in cash offsetting this, leading to net cash of CN¥35.4b.

NYSE:NIO Debt to Equity History May 8th 2022

A Look At NIO’s Liabilities

The latest balance sheet data shows that NIO had liabilities of CN¥29.2b due within a year, and liabilities of CN¥15.6b falling due after that. Offsetting this, it had CN¥52.5b in cash and CN¥4.84b in receivables that were due within 12 months. So it can boast CN¥12.5b more liquid assets than total liabilities.

This short term liquidity is a sign that NIO could probably pay off its debt with ease, 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 manage its debt safely. When analyzing debt levels, the balance sheet is the obvious 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.

In the last year NIO wasn’t profitable at an EBIT level, but managed to grow its revenue by 122%, to CN¥36b. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is NIO?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months NIO lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.1b of cash and made a loss of CN¥11b. Given it only has net cash of CN¥35.4b, the company may need to raise more capital if it doesn’t reach break-even soon. Importantly, NIO’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 1 warning sign for NIO that you should be aware of before investing here.

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.

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.

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