Is KE Holdings (NYSE:BEKE) A Risky Investment?

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.' 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 can see that KE Holdings Inc. (NYSE:BEKE) does use debt in its business. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is KE Holdings's Debt?

As you can see below, KE Holdings had CN¥288.3m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥52.8b in cash to offset that, meaning it has CN¥52.5b net cash.

How Strong Is KE Holdings' Balance Sheet?

We can see from the most recent balance sheet that KE Holdings had liabilities of CN¥52.7b falling due within a year, and liabilities of CN¥8.96b due beyond that. Offsetting these obligations, it had cash of CN¥52.8b as well as receivables valued at CN¥8.73b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that KE Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥162.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, KE Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for KE Holdings

On the other hand, KE Holdings's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 KE 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While KE Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, KE Holdings actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about KE Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥52.5b. The cherry on top was that in converted 224% of that EBIT to free cash flow, bringing in CN¥9.4b. So we are not troubled with KE Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for KE Holdings that 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.

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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.