Here's Why ZTO Express (Cayman) (NYSE:ZTO) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that ZTO Express (Cayman) Inc. (NYSE:ZTO) does use debt in its business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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)

What Is ZTO Express (Cayman)'s Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 ZTO Express (Cayman) had debt of CN¥13.9b, up from CN¥7.06b in one year. But it also has CN¥15.7b in cash to offset that, meaning it has CN¥1.88b net cash.

How Healthy Is ZTO Express (Cayman)'s Balance Sheet?

The latest balance sheet data shows that ZTO Express (Cayman) had liabilities of CN¥17.7b due within a year, and liabilities of CN¥7.99b falling due after that. Offsetting these obligations, it had cash of CN¥15.7b as well as receivables valued at CN¥2.32b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.66b.

Of course, ZTO Express (Cayman) has a titanic market capitalization of CN¥144.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

On top of that, ZTO Express (Cayman) grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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) reported free cash flow worth 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

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¥1.88b in net cash. And we liked the look of last year's 46% year-on-year EBIT growth. So is ZTO Express (Cayman)'s debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that ZTO Express (Cayman) insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.