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Investors looking for stocks with high market liquidity and zero debt on the balance sheet should consider Pinduoduo Inc. (NASDAQ:PDD). With a market valuation of US$23b, PDD is a safe haven in times of market uncertainty due to its strong balance sheet. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for PDD, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
Can PDD service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. For PDD, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with PDD, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can PDD pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Pinduoduo has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at PDD’s CN¥25b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥47b, with a current ratio of 1.9x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Online Retail companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
PDD has zero debt in addition to ample cash to cover its short-term commitments. Its strong balance sheet reduces risk for the company and its investors. Keep in mind I haven't considered other factors such as how PDD has performed in the past. You should continue to research Pinduoduo to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PDD’s future growth? Take a look at our free research report of analyst consensus for PDD’s outlook.
- Valuation: What is PDD worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PDD is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.