Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, ZTO Express (Cayman) Inc. (NYSE:ZTO) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is ZTO Express (Cayman)'s Debt?
The image below, which you can click on for greater detail, shows that at June 2024 ZTO Express (Cayman) had debt of CN¥17.6b, up from CN¥13.9b in one year. However, its balance sheet shows it holds CN¥20.4b in cash, so it actually has CN¥2.83b net cash.
How Strong Is ZTO Express (Cayman)'s Balance Sheet?
The latest balance sheet data shows that ZTO Express (Cayman) had liabilities of CN¥22.1b due within a year, and liabilities of CN¥8.04b falling due after that. Offsetting these obligations, it had cash of CN¥20.4b as well as receivables valued at CN¥1.93b due within 12 months. So its liabilities total CN¥7.76b more than the combination of its cash and short-term receivables.
Given ZTO Express (Cayman) has a humongous market capitalization of CN¥143.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
And we also note warmly that ZTO Express (Cayman) grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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. Looking at the most recent three years, ZTO Express (Cayman) recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that ZTO Express (Cayman) has CN¥2.83b in net cash. And it also grew its EBIT by 13% over the last year. So is ZTO Express (Cayman)'s debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for ZTO Express (Cayman) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
