PDD Holdings (NASDAQ:PDD) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. 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.

What Risk Does Debt Bring?

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. 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 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

How Much Debt Does PDD Holdings Carry?

The image below, which you can click on for greater detail, shows that PDD Holdings had debt of CN¥5.31b at the end of March 2024, a reduction from CN¥15.3b over a year. But it also has CN¥242.1b in cash to offset that, meaning it has CN¥236.8b net cash.

How Strong Is PDD Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PDD Holdings had liabilities of CN¥151.4b due within 12 months and liabilities of CN¥7.72b due beyond that. Offsetting this, it had CN¥242.1b in cash and CN¥11.7b in receivables that were due within 12 months. So it can boast CN¥94.8b 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!

Even more impressive was the fact that PDD Holdings grew its EBIT by 121% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, PDD Holdings actually produced more free cash flow than EBIT over the last three years. 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¥236.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in CN¥113b. So we don't think PDD Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for PDD Holdings that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.