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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.' 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 PDD Holdings Inc. (NASDAQ:PDD) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
View our latest analysis for PDD Holdings
How Much Debt Does PDD Holdings Carry?
As you can see below, PDD Holdings had CN¥5.18b of debt at September 2024, down from CN¥16.0b a year prior. But it also has CN¥308.5b in cash to offset that, meaning it has CN¥303.3b net cash.
How Strong Is PDD Holdings' Balance Sheet?
We can see from the most recent balance sheet that PDD Holdings had liabilities of CN¥180.0b falling due within a year, and liabilities of CN¥8.29b due beyond that. Offsetting these obligations, it had cash of CN¥308.5b as well as receivables valued at CN¥13.9b due within 12 months. So it actually has CN¥134.1b more liquid assets than total liabilities.
This surplus suggests that PDD Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that PDD Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Better yet, PDD Holdings grew its EBIT by 132% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.