Is Kingsoft Cloud Holdings (NASDAQ:KC) 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. We note that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Kingsoft Cloud Holdings had CN¥352.8m of debt, an increase on CN¥174.4m, over one year. However, its balance sheet shows it holds CN¥6.12b in cash, so it actually has CN¥5.76b net cash.

How Strong Is Kingsoft Cloud Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kingsoft Cloud Holdings had liabilities of CN¥3.47b due within 12 months and liabilities of CN¥223.6m due beyond that. Offsetting these obligations, it had cash of CN¥6.12b as well as receivables valued at CN¥2.79b due within 12 months. So it can boast CN¥5.21b 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. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Kingsoft Cloud Holdings 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.

Over 12 months, Kingsoft Cloud Holdings reported revenue of CN¥6.6b, 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 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¥1.9b of cash and made a loss of CN¥982m. However, it has net cash of CN¥5.76b, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Kingsoft Cloud Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Cloud Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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