Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Kingsoft Cloud Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Kingsoft Cloud Holdings had debt of CN¥279.9m at the end of March 2020, a reduction from CN¥584.5m over a year. But on the other hand it also has CN¥2.20b in cash, leading to a CN¥1.92b net cash position.
How Healthy Is Kingsoft Cloud Holdings's Balance Sheet?
We can see from the most recent balance sheet that Kingsoft Cloud Holdings had liabilities of CN¥3.03b falling due within a year, and liabilities of CN¥295.4m due beyond that. Offsetting this, it had CN¥2.20b in cash and CN¥1.87b in receivables that were due within 12 months. So it actually has CN¥740.4m more liquid assets than total liabilities.
Having regard to Kingsoft Cloud Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥42.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, 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 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 70%, to CN¥4.5b. With any luck the company will be able to grow its way to profitability.
So How Risky Is Kingsoft Cloud Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Kingsoft Cloud Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥1.2b of cash and made a loss of CN¥1.3b. However, it has net cash of CN¥1.92b, 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. Take risks, for example - Kingsoft Cloud Holdings has 2 warning signs we think you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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