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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for ZTO Express (Cayman)

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

The image below, which you can click on for greater detail, shows that at September 2022 ZTO Express (Cayman) had debt of CN¥14.0b, up from CN¥4.43b in one year. However, its balance sheet shows it holds CN¥21.5b in cash, so it actually has CN¥7.57b net cash.

A Look At ZTO Express (Cayman)'s Liabilities

Zooming in on the latest balance sheet data, we can see that ZTO Express (Cayman) had liabilities of CN¥17.5b due within 12 months and liabilities of CN¥7.72b due beyond that. Offsetting this, it had CN¥21.5b in cash and CN¥1.92b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.75b more than its cash and near-term receivables, combined.

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¥156.3b 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.

On top of that, ZTO Express (Cayman) grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. 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, 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. Considering the last three years, ZTO Express (Cayman) actually recorded a cash outflow, overall. 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

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¥7.57b. And we liked the look of last year's 46% year-on-year EBIT growth. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.