Is Kingsoft Cloud Holdings (NASDAQ:KC) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Net Debt?

As you can see below, Kingsoft Cloud Holdings had CN¥1.68b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥4.29b in cash, leading to a CN¥2.61b net cash position.

A Look At Kingsoft Cloud Holdings' Liabilities

According to the last reported balance sheet, Kingsoft Cloud Holdings had liabilities of CN¥6.75b due within 12 months, and liabilities of CN¥1.10b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.29b as well as receivables valued at CN¥2.34b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.

Since publicly traded Kingsoft Cloud Holdings shares are worth a total of CN¥8.29b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kingsoft Cloud Holdings also has more cash than debt, so we're pretty confident 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Kingsoft Cloud Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥7.8b, which is a fall of 15%. That's not what we would hope to see.

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¥1.2b of cash and made a loss of CN¥2.4b. But at least it has CN¥2.61b on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Kingsoft Cloud Holdings has 1 warning sign we think you should be aware of.

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.