Is ZTO Express (Cayman) (NYSE:ZTO) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ZTO Express (Cayman)

How Much Debt Does ZTO Express (Cayman) Carry?

As you can see below, at the end of March 2024, ZTO Express (Cayman) had CN¥15.2b of debt, up from CN¥13.4b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥19.6b in cash, so it actually has CN¥4.42b net cash.

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

The latest balance sheet data shows that ZTO Express (Cayman) had liabilities of CN¥23.3b due within a year, and liabilities of CN¥8.22b falling due after that. Offsetting these obligations, it had cash of CN¥19.6b as well as receivables valued at CN¥1.74b due within 12 months. So it has liabilities totalling CN¥10.1b more than its cash and near-term receivables, combined.

Given ZTO Express (Cayman) has a humongous market capitalization of CN¥124.5b, it's hard to believe these liabilities pose much threat. 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.

Also positive, ZTO Express (Cayman) grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ZTO Express (Cayman) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ZTO Express (Cayman) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, ZTO Express (Cayman)'s free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥4.42b in net cash. And it impressed us with its EBIT growth of 21% over the last year. So is ZTO Express (Cayman)'s debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with ZTO Express (Cayman) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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