Health Check: How Prudently Does Kingsoft Cloud Holdings (NASDAQ:KC) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Kingsoft Cloud Holdings Limited (NASDAQ:KC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Kingsoft Cloud Holdings had debt of CN¥664.4m, up from CN¥302.8m in one year. But on the other hand it also has CN¥5.47b in cash, leading to a CN¥4.81b net cash position.

A Look At Kingsoft Cloud Holdings' Liabilities

The latest balance sheet data shows that Kingsoft Cloud Holdings had liabilities of CN¥4.10b due within a year, and liabilities of CN¥423.6m falling due after that. Offsetting these obligations, it had cash of CN¥5.47b as well as receivables valued at CN¥3.67b due within 12 months. So it actually has CN¥4.62b more liquid assets than total liabilities.

This surplus suggests that Kingsoft Cloud Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kingsoft Cloud Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kingsoft Cloud Holdings reported revenue of CN¥7.6b, which is a gain of 50%, 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 in the last year Kingsoft Cloud Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥2.0b of cash and made a loss of CN¥814m. But at least it has CN¥4.81b 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. We've identified 2 warning signs with Kingsoft Cloud Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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