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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.' 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 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ZTO Express (Cayman) Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 ZTO Express (Cayman) had CN¥2.91b of debt, an increase on CN¥300.0m, over one year. But it also has CN¥16.6b in cash to offset that, meaning it has CN¥13.7b net cash.
How Healthy Is ZTO Express (Cayman)'s Balance Sheet?
We can see from the most recent balance sheet that ZTO Express (Cayman) had liabilities of CN¥11.3b falling due within a year, and liabilities of CN¥767.1m due beyond that. On the other hand, it had cash of CN¥16.6b and CN¥1.31b worth of receivables due within a year. So it can boast CN¥5.85b 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!
While ZTO Express (Cayman) doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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. During the last three years, ZTO Express (Cayman) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that ZTO Express (Cayman) has net cash of CN¥13.7b, as well as more liquid assets than liabilities. So we don't have any problem with ZTO Express (Cayman)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that ZTO Express (Cayman) is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.
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.
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