David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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.
When Is Debt Dangerous?
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. 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. 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. 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 Debt?
The chart below, which you can click on for greater detail, shows that Kingsoft Cloud Holdings had CN¥1.68b in debt in June 2023; about the same as the year before. But it also has CN¥4.29b in cash to offset that, meaning it has CN¥2.61b net cash.
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¥6.75b due within 12 months and liabilities of CN¥1.10b due beyond that. On the other hand, it had cash of CN¥4.29b and CN¥2.34b worth of receivables due within a year. So it has liabilities totalling CN¥1.21b more than its cash and near-term receivables, combined.
Since publicly traded Kingsoft Cloud Holdings shares are worth a total of CN¥8.12b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Kingsoft Cloud Holdings also has more cash than debt, so we're pretty confident 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.
Over 12 months, Kingsoft Cloud Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥7.8b, which is a fall of 15%. 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 we do note that Kingsoft Cloud Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥2.4b accounting loss. But at least it has CN¥2.61b on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Kingsoft Cloud Holdings is showing 2 warning signs in our investment analysis , you should know about...
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.