InvestorPlace’s Vince Martin pointed out in his June 7 article that Chinese electric vehicle maker Nio (NYSE:NIO) had a negative gross margin in the first quarter. That’s not a good sign if you own Nio stock.
In fact, Martin suggested that the Nio stock price could hit zero in the future, despite all the promise of the electric car maker’s products.
“Nio isn’t necessarily going bankrupt in three quarters or even three years. But it does not have unlimited time. It’s unlikely to be able to borrow much, given its meager asset base. Selling additional Nio stock will be difficult and would send Nio stock price even lower,” Martin wrote June 7.
Negative Gross Margins
Frankly, I’m not sure why anyone would invest in a company that has negative gross margins. Yet, Nio’s had negative gross profits in three out of the last four quarters and investors are still buying Nio stock.
Is that the definition of insanity or what?
By comparison, Tesla’s (NASDAQ:TSLA) had positive gross profits for the last five years — its gross profits had grown from $881.7 million in 2014 to $4.0 billion in 2018 — and, yet, some investors are actually opting to buy Nio stock over TSLA.
While the company’s negative gross margin is a big reason to shy away from investing in Nio stock, it isn’t the financial metric that makes Nio stock a loser.
The Altman Z-Score
For that, one needs to calculate the company’s Altman Z-Score, which assesses the likelihood of a company going bankrupt within two years. I won’t bore you with the formula. You can find that here.
The important thing is that the Altman Z-Score gives you a better idea of a company’s financial health at any given time. As the numbers on a company’s balance sheet and income statement change, so too will its score, both positively and negatively.
Taking its latest balance sheet and income statement financials from Morningstar, I’ve calculated Nio’s Altman Z-Score to be -4.67. Anything less than 1.81 represents a company in distress.
NIO’s Altman Z-Score
The Bottom Line on Nio Stock
So, although my colleague didn’t suggest it’s going bankrupt anytime soon, I believe Nio’s Altman Z-Score indicates that if it doesn’t shore up its business soon, there’s an excellent possibility it could face financial distress in the next 12-24 months.
That’s especially true when you consider how much competition Nio has on the electric front in China. It’s tough enough to right the ship financially when the competition isn’t a problem, but things are going to get very difficult for Nio in the second quarter and beyond.
Therefore, based on the company’s competitive threats, a negative gross margin, and the real threat of bankruptcy in the future, I’m not sure how you can consider Nio stock anything but a losing proposition.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.