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

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 should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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

You can click the graphic below for the historical numbers, but it shows that as of December 2024 ZTO Express (Cayman) had CN¥16.8b of debt, an increase on CN¥14.8b, over one year. However, it does have CN¥22.5b in cash offsetting this, leading to net cash of CN¥5.71b.

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

The latest balance sheet data shows that ZTO Express (Cayman) had liabilities of CN¥28.3b due within a year, and liabilities of CN¥1.39b falling due after that. Offsetting these obligations, it had cash of CN¥22.5b as well as receivables valued at CN¥3.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.97b.

Since publicly traded ZTO Express (Cayman) shares are worth a very impressive total of CN¥109.3b, it seems unlikely that this level of liabilities would be a major 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.

View our latest analysis for ZTO Express (Cayman)

And we also note warmly that ZTO Express (Cayman) grew its EBIT by 17% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, ZTO Express (Cayman) produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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¥5.71b. And it impressed us with its EBIT growth of 17% over the last year. So is ZTO Express (Cayman)'s debt a risk? It doesn't seem so to us. Given ZTO Express (Cayman) has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.