Despite Lacking Profits Kingsoft Cloud Holdings (NASDAQ:KC) Seems To Be On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Kingsoft Cloud Holdings Limited (NASDAQ:KC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Kingsoft Cloud Holdings had debt of CN¥402.8m, up from CN¥214.4m in one year. But on the other hand it also has CN¥6.80b in cash, leading to a CN¥6.39b net cash position.

A Look At Kingsoft Cloud Holdings's Liabilities

The latest balance sheet data shows that Kingsoft Cloud Holdings had liabilities of CN¥3.32b due within a year, and liabilities of CN¥251.1m falling due after that. Offsetting these obligations, it had cash of CN¥6.80b as well as receivables valued at CN¥2.15b due within 12 months. So it actually has CN¥5.38b more liquid assets than total liabilities.

This short term liquidity is a sign that Kingsoft Cloud Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kingsoft Cloud Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Kingsoft Cloud Holdings'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.

Over 12 months, Kingsoft Cloud Holdings reported revenue of CN¥5.8b, which is a gain of 66%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Kingsoft Cloud Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Kingsoft Cloud Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥1.5b of cash and made a loss of CN¥1.2b. But at least it has CN¥6.39b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Kingsoft Cloud Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Kingsoft Cloud Holdings that you should be aware of before investing here.

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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