Shares of Pinduoduo Inc. PDD rose by 33.35% in the past three months. Before having a look at the importance of debt, let's look at how much debt Pinduoduo has.
Based on Pinduoduo's balance sheet as of April 25, 2022, long-term debt is at $1.85 billion and current debt is at $9.81 billion, amounting to $11.66 billion in total debt. Adjusted for $1.01 billion in cash-equivalents, the company's net debt is at $10.65 billion.
Let's define some of the terms we used in the paragraph above. Current debt is the portion of a company's debt which is due within 1 year, while long-term debt is the portion due in more than 1 year. Cash equivalents includes cash and any liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
Investors look at the debt-ratio to understand how much financial leverage a company has. Pinduoduo has $28.44 billion in total assets, therefore making the debt-ratio 0.41. Generally speaking, a debt-ratio more than 1 means that a large portion of debt is funded by assets. As the debt-ratio increases, so the does the risk of defaulting on loans, if interest rates were to increase. Different industries have different thresholds of tolerance for debt-ratios. A debt ratio of 25% might be higher for one industry, but average for another.
Why Investors Look At Debt?
Besides equity, debt is an important factor in the capital structure of a company, and contributes to its growth. Due to its lower financing cost compared to equity, it becomes an attractive option for executives trying to raise capital.
However, interest-payment obligations can have an adverse impact on the cash-flow of the company. Having financial leverage also allows companies to use additional capital for business operations, allowing equity owners to retain excess profit, generated by the debt capital.
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This article was generated by Benzinga's automated content engine and reviewed by an editor.
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