Pinduoduo (NASDAQ:PDD) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Pinduoduo Inc. (NASDAQ:PDD) makes use of debt. But the real question is whether this debt is making the company risky.

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Pinduoduo

What Is Pinduoduo's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Pinduoduo had debt of CN¥15.7b, up from CN¥11.7b in one year. But on the other hand it also has CN¥137.8b in cash, leading to a CN¥122.1b net cash position.

How Strong Is Pinduoduo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pinduoduo had liabilities of CN¥85.4b due within 12 months and liabilities of CN¥16.5b due beyond that. On the other hand, it had cash of CN¥137.8b and CN¥5.16b worth of receivables due within a year. So it actually has CN¥41.0b more liquid assets than total liabilities.

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

Although Pinduoduo made a loss at the EBIT level, last year, it was also good to see that it generated CN¥28b in EBIT over the last twelve months. 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 Pinduoduo'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. Pinduoduo 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 year, Pinduoduo 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 Pinduoduo has CN¥122.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥35b, being 124% of its EBIT. So we don't think Pinduoduo'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. Be aware that Pinduoduo is showing 1 warning sign in our investment analysis , you should know about...

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.