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 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. Importantly, ZTO Express (Cayman) Inc. (NYSE:ZTO) does carry debt. But the more important question is: how much risk is that debt creating?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does ZTO Express (Cayman) Carry?

The image below, which you can click on for greater detail, shows that at March 2024 ZTO Express (Cayman) had debt of CN¥15.2b, up from CN¥13.4b in one year. But it also has CN¥19.6b in cash to offset that, meaning it has CN¥4.42b 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¥23.3b falling due within a year, and liabilities of CN¥8.22b due beyond that. Offsetting these obligations, it had cash of CN¥19.6b as well as receivables valued at CN¥1.74b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥10.1b.

Given ZTO Express (Cayman) has a humongous market capitalization of CN¥116.8b, 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. Despite its noteworthy liabilities, ZTO Express (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, ZTO Express (Cayman) grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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'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. In the last three years, ZTO Express (Cayman)'s free cash flow amounted to 41% of its EBIT, less 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¥4.42b in net cash. And it impressed us with its EBIT growth of 21% over the last year. So we don't think ZTO Express (Cayman)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with ZTO Express (Cayman) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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