Does ZTO Express (Cayman) (NYSE:ZTO) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, ZTO Express (Cayman) Inc. (NYSE:ZTO) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 ZTO Express (Cayman)

How Much Debt Does ZTO Express (Cayman) Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 ZTO Express (Cayman) had CN¥6.05b of debt, an increase on CN¥2.91b, over one year. However, its balance sheet shows it holds CN¥13.9b in cash, so it actually has CN¥7.85b net cash.

A Look At ZTO Express (Cayman)'s Liabilities

Zooming in on the latest balance sheet data, we can see that ZTO Express (Cayman) had liabilities of CN¥15.9b due within 12 months and liabilities of CN¥825.1m due beyond that. On the other hand, it had cash of CN¥13.9b and CN¥1.90b worth of receivables due within a year. So it has liabilities totalling CN¥903.0m more than its cash and near-term receivables, combined.

Having regard to ZTO Express (Cayman)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥134.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ZTO Express (Cayman) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that ZTO Express (Cayman) grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 ZTO Express (Cayman)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While ZTO Express (Cayman) 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 three years, ZTO Express (Cayman) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ZTO Express (Cayman) has CN¥7.85b in net cash. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with ZTO Express (Cayman)'s use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ZTO Express (Cayman)'s earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.