Is ZTO Express (Cayman) (NYSE:ZTO) Using Too Much Debt?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ZTO Express (Cayman) Inc. (NYSE:ZTO) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for ZTO Express (Cayman)
How Much Debt Does ZTO Express (Cayman) Carry?
The image below, which you can click on for greater detail, shows that at December 2021 ZTO Express (Cayman) had debt of CN¥3.46b, up from CN¥1.43b in one year. But on the other hand it also has CN¥12.6b in cash, leading to a CN¥9.11b net cash position.
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¥13.0b due within 12 months and liabilities of CN¥848.4m due beyond that. On the other hand, it had cash of CN¥12.6b and CN¥2.18b worth of receivables due within a year. So it actually has CN¥900.7m more liquid assets than total liabilities.
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¥134.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ZTO Express (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that ZTO Express (Cayman) grew its EBIT at 16% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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. Looking at the most recent three years, ZTO Express (Cayman) recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
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¥9.11b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 16% over the last year. So we are not troubled with ZTO Express (Cayman)'s debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of ZTO Express (Cayman)'s earnings per share history for free.
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.
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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.
