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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Kingsoft Cloud Holdings Limited (NASDAQ:KC) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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.
How Much Debt Does Kingsoft Cloud Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Kingsoft Cloud Holdings had CN¥402.8m of debt, an increase on CN¥214.4m, over one year. However, its balance sheet shows it holds CN¥6.80b in cash, so it actually has CN¥6.39b 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¥3.32b due within 12 months and liabilities of CN¥251.1m due beyond that. On the other hand, it had cash of CN¥6.80b and CN¥2.15b worth of receivables due within a year. So it actually has CN¥5.38b 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kingsoft Cloud Holdings can strengthen its balance sheet over time. 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 reported revenue of CN¥5.8b, which is a gain of 66%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
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 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¥1.5b of cash and made a loss of CN¥1.2b. However, it has net cash of CN¥6.39b, 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. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Kingsoft Cloud Holdings that you should be aware of before investing here.
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.
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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