These 4 Measures Indicate That ZTO Express (Cayman) (NYSE:ZTO) Is Using Debt Reasonably Well

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

See 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 September 2024 ZTO Express (Cayman) had debt of CN¥17.7b, up from CN¥16.8b in one year. However, its balance sheet shows it holds CN¥22.9b in cash, so it actually has CN¥5.17b 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¥31.3b due within a year, and liabilities of CN¥915.2m falling due after that. Offsetting this, it had CN¥22.9b in cash and CN¥2.15b in receivables that were due within 12 months. So it has liabilities totalling CN¥7.13b more than its cash and near-term receivables, combined.

Given ZTO Express (Cayman) has a humongous market capitalization of CN¥110.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

And we also note warmly that ZTO Express (Cayman) grew its EBIT by 15% last year, making its debt load easier to handle. 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.

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. Looking at the most recent three years, ZTO Express (Cayman) recorded free cash flow of 46% of its EBIT, which is weaker 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¥5.17b in net cash. And it also grew its EBIT by 15% over the last year. So we don't think ZTO Express (Cayman)'s use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check ZTO Express (Cayman)'s dividend history, without delay!

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.