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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies PDD Holdings Inc. (NASDAQ:PDD) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is PDD Holdings's Debt?

The chart below, which you can click on for greater detail, shows that PDD Holdings had CN¥5.30b in debt in March 2025; about the same as the year before. However, its balance sheet shows it holds CN¥364.5b in cash, so it actually has CN¥359.2b net cash.

How Strong Is PDD Holdings' Balance Sheet?

According to the last reported balance sheet, PDD Holdings had liabilities of CN¥197.0b due within 12 months, and liabilities of CN¥3.79b due beyond 12 months. Offsetting these obligations, it had cash of CN¥364.5b as well as receivables valued at CN¥12.9b due within 12 months. So it can boast CN¥176.6b more liquid assets than total liabilities.

This excess liquidity suggests that PDD Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, PDD Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for PDD Holdings

Also positive, PDD Holdings grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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 three years, PDD Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that PDD Holdings has net cash of CN¥359.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in CN¥115b. So we don't think PDD Holdings's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in PDD Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.