Kingsoft (HKG:3888) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Kingsoft Corporation Limited (HKG:3888) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Kingsoft

How Much Debt Does Kingsoft Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Kingsoft had CN¥2.23b of debt, an increase on CN¥531.4m, over one year. But on the other hand it also has CN¥18.2b in cash, leading to a CN¥16.0b net cash position.

A Look At Kingsoft's Liabilities

We can see from the most recent balance sheet that Kingsoft had liabilities of CN¥2.96b falling due within a year, and liabilities of CN¥3.55b due beyond that. On the other hand, it had cash of CN¥18.2b and CN¥750.8m worth of receivables due within a year. So it actually has CN¥12.5b more liquid assets than total liabilities.

This luscious liquidity implies that Kingsoft's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Kingsoft boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kingsoft has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last two years, Kingsoft generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Kingsoft has CN¥16.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥2.4b. When it comes to Kingsoft's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Kingsoft you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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