Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ZTO Express (Cayman) Inc. (NYSE:ZTO) does carry debt. 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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 2023, ZTO Express (Cayman) had CN„13.4b of debt, up from CN„6.05b a year ago. Click the image for more detail. But it also has CN„18.4b in cash to offset that, meaning it has CN„5.07b net cash.
How Strong Is ZTO Express (Cayman)'s Balance Sheet?
According to the last reported balance sheet, ZTO Express (Cayman) had liabilities of CN„19.1b due within 12 months, and liabilities of CN„7.59b due beyond 12 months. Offsetting these obligations, it had cash of CN„18.4b as well as receivables valued at CN„1.83b due within 12 months. So it has liabilities totalling CN„6.43b more than its cash and near-term receivables, combined.
Of course, ZTO Express (Cayman) has a titanic market capitalization of CN„148.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ZTO Express (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that ZTO Express (Cayman) has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
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) barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.
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„5.07b. And it impressed us with its EBIT growth of 43% over the last year. So we are not troubled with ZTO Express (Cayman)'s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ZTO Express (Cayman)'s earnings per share history for free.
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.
About NYSE:ZTO
ZTO Express (Cayman)
Provides express delivery and other value-added logistics services in the People's Republic of China.
Undervalued with excellent balance sheet.