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Health Check: How Prudently Does Pinduoduo (NASDAQ:PDD) Use Debt?

Simply Wall St

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pinduoduo

What Is Pinduoduo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2019 Pinduoduo had CN¥5.14b of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥40.3b in cash, so it actually has CN¥35.1b net cash.

NasdaqGS:PDD Historical Debt, January 7th 2020

A Look At Pinduoduo's Liabilities

The latest balance sheet data shows that Pinduoduo had liabilities of CN¥33.2b due within a year, and liabilities of CN¥5.40b falling due after that. On the other hand, it had cash of CN¥40.3b and CN¥1.78b worth of receivables due within a year. So it actually has CN¥3.41b 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 while it's hard to imagine that the CN¥325.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Pinduoduo boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Pinduoduo reported revenue of CN¥25b, which is a gain of 189%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Pinduoduo?

While Pinduoduo lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥11b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 189% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like Pinduoduo I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.