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 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?
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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Kingsoft Cloud Holdings
What Is Kingsoft Cloud Holdings's Debt?
As you can see below, at the end of March 2022, Kingsoft Cloud Holdings had CN¥2.14b of debt, up from CN¥452.1m a year ago. Click the image for more detail. But it also has CN¥5.60b in cash to offset that, meaning it has CN¥3.46b net cash.
A Look At Kingsoft Cloud Holdings' Liabilities
The latest balance sheet data shows that Kingsoft Cloud Holdings had liabilities of CN¥6.89b due within a year, and liabilities of CN¥2.03b falling due after that. On the other hand, it had cash of CN¥5.60b and CN¥4.39b worth of receivables due within a year. So it can boast CN¥1.07b more liquid assets than total liabilities.
This excess liquidity suggests that Kingsoft Cloud Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kingsoft Cloud Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Kingsoft Cloud Holdings reported revenue of CN¥9.4b, which is a gain of 35%, 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?
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. And over the same period it saw negative free cash outflow of CN¥2.0b and booked a CN¥1.8b accounting loss. But at least it has CN¥3.46b on the balance sheet to spend on growth, near-term. 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. 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 3 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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