What happened

Shares of GDS Holdings (NASDAQ:GDS) jumped on Thursday after West Capital Management disclosed a significant stake in the Chinese data center company. Shares of GDS had previously tumbled after a short-seller targeted the stock, but partially recovered when the company denied the allegations. GDS stock was up about 13.9% at 12:10 p.m. EDT.

So what

West Capital Management disclosed a passive stake in GDS on Thursday. As of Aug. 1, the 12 West Onshore Fund owned about 3.2 million American depositary shares (ADS) of GDS, along with call options to buy up to 112,600 additional shares. The 12 West Offshore Fund held about 2.5 million ADS shares, with call options to buy up to 87,400 more. With about 940 million outstanding Class A shares, and with each ADS share representing eight Class A shares, West Capital Management's stake amounts to 5% of all outstanding shares.

Servers in a data center.

Image source: Getty Images.

This development comes after Blue Orca Capital published a report accusing GDS of reckless borrowing aimed at enriching insiders. Blue Orca valued the stock at just $4.32 per share, a small fraction of the current stock price.

Now what

West Capital Management provided no rationale for its investment in the Securities and Exchange Commission filing announcing the stake. GDS does have a debt-ridden balance sheet, with total debt and capital lease obligations of about $1.2 billion at the end of the first quarter. The company's interest payments very nearly wipe out its gross profits, which is not a sustainable situation.

Should investors follow West Capital into GDS stock? The balance sheet alone is enough reason to stay away, in my book.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.