Is Kingsoft Cloud Holdings (NASDAQ:KC) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

As you can see below, Kingsoft Cloud Holdings had CN¥1.84b of debt at March 2023, down from CN¥2.14b a year prior. However, its balance sheet shows it holds CN¥4.46b in cash, so it actually has CN¥2.62b net cash.

How Strong Is Kingsoft Cloud Holdings' Balance Sheet?

We can see from the most recent balance sheet that Kingsoft Cloud Holdings had liabilities of CN¥6.55b falling due within a year, and liabilities of CN¥1.06b due beyond that. Offsetting this, it had CN¥4.46b in cash and CN¥2.54b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥599.5m.

Of course, Kingsoft Cloud Holdings has a market capitalization of CN¥10.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, 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.

In the last year Kingsoft Cloud Holdings had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥7.9b. We would much prefer see growth.

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 the fact is that over the last twelve months Kingsoft Cloud Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥894m and booked a CN¥2.7b accounting loss. However, it has net cash of CN¥2.62b, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For instance, we've identified 2 warning signs for Kingsoft Cloud Holdings (1 is concerning) 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.