Is PDD Holdings (NASDAQ:PDD) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that PDD Holdings Inc. (NASDAQ:PDD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PDD Holdings

What Is PDD Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that PDD Holdings had CN¥16.0b in debt in September 2023; about the same as the year before. But on the other hand it also has CN¥202.8b in cash, leading to a CN¥186.9b net cash position.

How Strong Is PDD Holdings' Balance Sheet?

According to the last reported balance sheet, PDD Holdings had liabilities of CN¥148.1b due within 12 months, and liabilities of CN¥4.08b due beyond 12 months. On the other hand, it had cash of CN¥202.8b and CN¥8.69b worth of receivables due within a year. So it can boast CN¥59.3b more liquid assets than total liabilities.

This short term liquidity is a sign that PDD Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, PDD Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, PDD Holdings grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PDD Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 two years, PDD Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case PDD Holdings has CN¥186.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥83b, being 161% of its EBIT. So we don't think PDD Holdings's use of debt is risky. 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. We've identified 1 warning sign with PDD 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.

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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.