ZTO Express (Cayman) (NYSE:ZTO) Seems To Use Debt Quite Sensibly

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 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. As with many other companies ZTO Express (Cayman) Inc. (NYSE:ZTO) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, 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 September 2021, ZTO Express (Cayman) had CN¥4.43b of debt, up from CN¥2.08b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥12.7b in cash, so it actually has CN¥8.29b net cash.

A Look At ZTO Express (Cayman)'s Liabilities

We can see from the most recent balance sheet that ZTO Express (Cayman) had liabilities of CN¥12.8b falling due within a year, and liabilities of CN¥846.1m due beyond that. Offsetting these obligations, it had cash of CN¥12.7b as well as receivables valued at CN¥1.83b due within 12 months. So it can boast CN¥958.4m more liquid assets than total liabilities.

This state of affairs indicates that ZTO Express (Cayman)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥162.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ZTO Express (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

ZTO Express (Cayman)'s EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, ZTO Express (Cayman) recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ZTO Express (Cayman) has net cash of CN¥8.29b, as well as more liquid assets than liabilities. So we don't have any problem with ZTO Express (Cayman)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with ZTO Express (Cayman) (including 1 which shouldn't be ignored) .

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.

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.

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