These 4 Measures Indicate That Kuaishou Technology (HKG:1024) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Kuaishou Technology (HKG:1024) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kuaishou Technology

How Much Debt Does Kuaishou Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Kuaishou Technology had debt of CN¥9.00b, up from none in one year. But it also has CN¥50.7b in cash to offset that, meaning it has CN¥41.7b net cash.

A Look At Kuaishou Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Kuaishou Technology had liabilities of CN¥57.1b due within 12 months and liabilities of CN¥16.6b due beyond that. Offsetting these obligations, it had cash of CN¥50.7b as well as receivables valued at CN¥6.22b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥16.8b.

Given Kuaishou Technology has a humongous market capitalization of CN¥172.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Kuaishou Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Kuaishou Technology grew its EBIT by 760% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kuaishou Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kuaishou Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Kuaishou Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Kuaishou Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥41.7b. The cherry on top was that in converted 225% of that EBIT to free cash flow, bringing in CN¥25b. So we don't think Kuaishou Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Kuaishou Technology, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.