Is Kingsoft Cloud Holdings (NASDAQ:KC) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kingsoft Cloud Holdings

What Is Kingsoft Cloud Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Kingsoft Cloud Holdings had CN¥2.18b of debt, an increase on CN¥1.66b, over one year. However, it does have CN¥2.26b in cash offsetting this, leading to net cash of CN¥72.4m.

How Strong 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¥6.83b due within 12 months and liabilities of CN¥995.8m due beyond that. Offsetting this, it had CN¥2.26b in cash and CN¥1.80b in receivables that were due within 12 months. So its liabilities total CN¥3.77b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥5.28b, so it does suggest shareholders should keep an eye on Kingsoft Cloud Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Kingsoft Cloud Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Kingsoft Cloud Holdings had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥7.0b. That's not what we would hope to see.

So How Risky Is Kingsoft Cloud Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥2.1b of cash and made a loss of CN¥2.2b. However, it has net cash of CN¥72.4m, 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. 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. We've identified 2 warning signs with Kingsoft Cloud Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.