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

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.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kingsoft Cloud Holdings

How Much Debt Does Kingsoft Cloud Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Kingsoft Cloud Holdings had CN¥1.77b of debt, an increase on CN¥901.5m, over one year. But on the other hand it also has CN¥5.33b in cash, leading to a CN¥3.56b net cash position.

How Strong Is Kingsoft Cloud Holdings' Balance Sheet?

According to the last reported balance sheet, Kingsoft Cloud Holdings had liabilities of CN¥7.20b due within 12 months, and liabilities of CN¥1.03b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.33b as well as receivables valued at CN¥3.50b due within 12 months. So it can boast CN¥592.0m 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Kingsoft Cloud Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.6%, to CN¥8.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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. And over the same period it saw negative free cash outflow of CN¥1.6b and booked a CN¥2.6b accounting loss. However, it has net cash of CN¥3.56b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kingsoft Cloud Holdings is showing 2 warning signs in our investment analysis , you should know about...

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. 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.