Is Kingsoft Cloud Holdings (NASDAQ:KC) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Kingsoft Cloud Holdings Limited (NASDAQ:KC) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, 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 March 2022 Kingsoft Cloud Holdings had CN¥1.91b of debt, an increase on CN¥452.1m, over one year. But on the other hand it also has CN¥5.60b in cash, leading to a CN¥3.70b 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¥6.89b due within 12 months, and liabilities of CN¥2.03b due beyond 12 months. On the other hand, it had cash of CN¥5.60b and CN¥3.84b worth of receivables due within a year. So it can boast CN¥521.1m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 35%, to CN¥9.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Kingsoft Cloud Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kingsoft Cloud Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥1.6b of cash and made a loss of CN¥1.8b. However, it has net cash of CN¥3.70b, 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kingsoft Cloud Holdings 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.