ZTO Express (Cayman) (NYSE:ZTO) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ZTO Express (Cayman) Inc. (NYSE:ZTO) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ZTO Express (Cayman)

What Is ZTO Express (Cayman)'s Debt?

As you can see below, at the end of June 2022, ZTO Express (Cayman) had CN¥7.06b of debt, up from CN¥3.39b a year ago. Click the image for more detail. However, it does have CN¥15.1b in cash offsetting this, leading to net cash of CN¥8.08b.

A Look At ZTO Express (Cayman)'s Liabilities

According to the last reported balance sheet, ZTO Express (Cayman) had liabilities of CN¥17.0b due within 12 months, and liabilities of CN¥791.0m due beyond 12 months. Offsetting this, it had CN¥15.1b in cash and CN¥1.93b in receivables that were due within 12 months. So its liabilities total CN¥703.7m more than the combination of its cash and short-term receivables.

Having regard to ZTO Express (Cayman)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥142.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

In addition to that, we're happy to report that ZTO Express (Cayman) has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

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¥8.08b. And it impressed us with its EBIT growth of 35% over the last year. So we don't have any problem with ZTO Express (Cayman)'s use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in ZTO Express (Cayman), you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.