Is Kingsoft (HKG:3888) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Kingsoft Corporation Limited (HKG:3888) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Kingsoft

What Is Kingsoft's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Kingsoft had debt of CN¥2.74b, up from CN¥2.41b in one year. But it also has CN¥23.9b in cash to offset that, meaning it has CN¥21.2b net cash.

How Healthy Is Kingsoft's Balance Sheet?

According to the last reported balance sheet, Kingsoft had liabilities of CN¥5.45b due within 12 months, and liabilities of CN¥3.53b due beyond 12 months. Offsetting these obligations, it had cash of CN¥23.9b as well as receivables valued at CN¥850.6m due within 12 months. So it actually has CN¥15.8b more liquid assets than total liabilities.

This luscious liquidity implies that Kingsoft's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Kingsoft boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kingsoft grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kingsoft's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kingsoft has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Kingsoft actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Kingsoft has CN¥21.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.3b, being 184% of its EBIT. The bottom line is that Kingsoft's use of debt is absolutely fine. Another factor that would give us confidence in Kingsoft would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.