We Think ZTO Express (Cayman) (NYSE:ZTO) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ZTO Express (Cayman) Inc. (NYSE:ZTO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View 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 2023 ZTO Express (Cayman) had debt of CN¥16.8b, up from CN¥14.0b in one year. But it also has CN¥16.9b in cash to offset that, meaning it has CN¥132.7m net cash.

A Look At ZTO Express (Cayman)'s Liabilities

The latest balance sheet data shows that ZTO Express (Cayman) had liabilities of CN¥21.1b due within a year, and liabilities of CN¥8.01b falling due after that. Offsetting these obligations, it had cash of CN¥16.9b as well as receivables valued at CN¥2.40b due within 12 months. So its liabilities total CN¥9.79b more than the combination of its cash and short-term receivables.

Given ZTO Express (Cayman) has a humongous market capitalization of CN¥113.9b, 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.

On top of that, ZTO Express (Cayman) grew its EBIT by 32% 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 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. Over the last three years, ZTO Express (Cayman) reported free cash flow worth 19% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

We could understand if investors are concerned about ZTO Express (Cayman)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥132.7m. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think ZTO Express (Cayman)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that ZTO Express (Cayman) is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.