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

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Pinduoduo Inc. (NASDAQ:PDD) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 Pinduoduo

How Much Debt Does Pinduoduo Carry?

As you can see below, at the end of March 2022, Pinduoduo had CN¥14.1b of debt, up from CN¥12.1b a year ago. Click the image for more detail. However, it does have CN¥95.2b in cash offsetting this, leading to net cash of CN¥81.2b.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Pinduoduo's Balance Sheet?

We can see from the most recent balance sheet that Pinduoduo had liabilities of CN¥77.5b falling due within a year, and liabilities of CN¥14.5b due beyond that. On the other hand, it had cash of CN¥95.2b and CN¥4.19b worth of receivables due within a year. So it can boast CN¥7.34b more liquid assets than total liabilities.

This state of affairs indicates that Pinduoduo's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥409.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Pinduoduo has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Pinduoduo turned things around in the last 12 months, delivering and EBIT of CN¥13b. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Pinduoduo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Pinduoduo 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 it is always sensible to investigate a company's debt, in this case Pinduoduo has CN¥81.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 153% of that EBIT to free cash flow, bringing in CN¥20b. So we don't think Pinduoduo'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. Be aware that Pinduoduo is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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