Is Kingsoft Cloud Holdings (NASDAQ:KC) Using Debt In A Risky Way?

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.' 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. Importantly, Kingsoft Cloud Holdings Limited (NASDAQ:KC) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for Kingsoft Cloud Holdings

How Much Debt Does Kingsoft Cloud Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Kingsoft Cloud Holdings had debt of CN¥901.5m, up from CN¥402.8m in one year. But it also has CN¥5.99b in cash to offset that, meaning it has CN¥5.09b net cash.

How Healthy 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¥5.93b due within 12 months and liabilities of CN¥2.11b due beyond that. Offsetting these obligations, it had cash of CN¥5.99b as well as receivables valued at CN¥4.70b due within 12 months. So it actually has CN¥2.65b 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. Succinctly put, Kingsoft Cloud Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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¥8.3b, which is a gain of 43%, 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?

Statistically speaking companies that lose money are riskier than those that make money. 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¥1.2b. But at least it has CN¥5.09b on the balance sheet to spend on growth, near-term. Kingsoft Cloud Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with Kingsoft Cloud Holdings .

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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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.