PDD Holdings (NASDAQ:PDD) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, PDD Holdings Inc. (NASDAQ:PDD) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PDD Holdings

What Is PDD Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that PDD Holdings had debt of CN¥5.18b at the end of September 2024, a reduction from CN¥16.0b over a year. But it also has CN¥308.5b in cash to offset that, meaning it has CN¥303.3b net cash.

A Look At PDD Holdings' Liabilities

The latest balance sheet data shows that PDD Holdings had liabilities of CN¥180.0b due within a year, and liabilities of CN¥8.29b falling due after that. Offsetting these obligations, it had cash of CN¥308.5b as well as receivables valued at CN¥13.9b due within 12 months. So it actually has CN¥134.1b 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. Simply put, the fact that PDD Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, PDD Holdings grew its EBIT by 132% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 we empathize with investors who find debt concerning, you should keep in mind that PDD Holdings has net cash of CN¥303.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥129b, being 138% of its EBIT. So we don't think PDD Holdings's use of debt is risky. 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. For instance, we've identified 1 warning sign for PDD Holdings that you should be aware of.

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.