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Pinduoduo Inc. (NASDAQ:PDD), a large-cap worth US$23b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for PDD, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Can PDD service its debt comfortably?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For Pinduoduo, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with PDD, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can PDD meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Pinduoduo has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at PDD’s CN¥25b in current liabilities, the company has been able to meet these commitments with a current assets level of CN¥47b, leading to a 1.9x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Online Retail companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
PDD has no debt in addition to ample cash to cover its near-term commitments. Its strong balance sheet reduces risk for the company and shareholders. Keep in mind I haven’t considered other factors such as how PDD has performed in the past. I suggest you continue to research Pinduoduo to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PDD’s future growth? Take a look at our free research report of analyst consensus for PDD’s outlook.
- Valuation: What is PDD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PDD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.