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

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. 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. We note that ZTO Express (Cayman) Inc. (NYSE:ZTO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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)

How Much Debt Does ZTO Express (Cayman) Carry?

As you can see below, at the end of March 2020, ZTO Express (Cayman) had CN¥300.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥15.1b in cash, leading to a CN¥14.8b net cash position.

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

Zooming in on the latest balance sheet data, we can see that ZTO Express (Cayman) had liabilities of CN¥8.15b due within 12 months and liabilities of CN¥745.0m due beyond that. On the other hand, it had cash of CN¥15.1b and CN¥1.34b worth of receivables due within a year. So it can boast CN¥7.58b more liquid assets than total liabilities.

This short term liquidity is a sign that ZTO Express (Cayman) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ZTO Express (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that ZTO Express (Cayman) grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ZTO Express (Cayman) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. In the last three years, ZTO Express (Cayman) created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case ZTO Express (Cayman) has CN¥14.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So we are not troubled with ZTO Express (Cayman)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ZTO Express (Cayman) is showing 2 warning signs in our investment analysis , and 1 of those is significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.