Kingsoft Cloud Holdings (NASDAQ:KC) Has Debt But No Earnings; Should You Worry?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Debt?

As you can see below, at the end of June 2022, Kingsoft Cloud Holdings had CN¥1.62b of debt, up from CN¥664.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.35b in cash, so it actually has CN¥3.73b net cash.

A Look At Kingsoft Cloud Holdings' Liabilities

We can see from the most recent balance sheet that Kingsoft Cloud Holdings had liabilities of CN¥7.39b falling due within a year, and liabilities of CN¥891.4m due beyond that. Offsetting this, it had CN¥5.35b in cash and CN¥3.23b in receivables that were due within 12 months. So it actually has CN¥297.7m 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. 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 20%, to CN¥9.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Kingsoft Cloud Holdings?

Statistically speaking companies that lose money are riskier than those that make money. 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¥1.4b of cash and made a loss of CN¥2.3b. But at least it has CN¥3.73b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 3 warning signs we've spotted with Kingsoft Cloud Holdings .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.