PDD Holdings (NASDAQ:PDD) Seems To Use Debt Rather Sparingly
Warren Buffett famously said, '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 PDD Holdings Inc. (NASDAQ:PDD) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for PDD Holdings
What Is PDD Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that PDD Holdings had CN¥5.26b of debt in June 2024, down from CN¥16.1b, one year before. However, its balance sheet shows it holds CN¥284.9b in cash, so it actually has CN¥279.7b net cash.
How Strong Is PDD Holdings' Balance Sheet?
The latest balance sheet data shows that PDD Holdings had liabilities of CN¥170.8b due within a year, and liabilities of CN¥7.93b falling due after that. On the other hand, it had cash of CN¥284.9b and CN¥11.5b worth of receivables due within a year. So it actually has CN¥117.6b more liquid assets than total liabilities.
This surplus suggests that PDD Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PDD Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that PDD Holdings grew its EBIT by 149% over twelve months. That boost will make it even easier to pay down debt going forward. 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 PDD 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. PDD Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, PDD Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case PDD Holdings has CN¥279.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in CN¥134b. So is PDD Holdings's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with PDD Holdings , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.