The Zip Co Ltd (ASX: Z1P) share price is up another 10.75% today (at the time of writing) and is sitting at $6.39 a share. That makes it a 5-bagger ASX share (up ~500%) in just 3 months – and a double-up in just the past month alone. That’s right, Zip shares were trading for $1.05 a share back in mid-March, making this buy now, pay later company one of the best ASX shares to have taken a punt on in the depths of the share market crash.

So what’s going on here? And more importantly, are Zip Co shares still a buy today?

Why the Zip Co share price has hit the roof

Along with its BNPL arch-rival Afterpay Ltd (ASX: APT), Zip has benefited form a massive shift in investor sentiment since the panic that March brought. As the extent of the coronavirus lockdowns became clear, investors hit the panic button on BNPL shares.

It was feared that a lockdown-induced credit crunch and massive job losses would lead to a wave of defaults from BNPL users. Despite what the companies might say, Zip and Afterpay can be considered credit providers (in my view). That’s because they extend lines of credit to their users which can be defaulted on.

During the March sell-off, Zip (along with Afterpay) seemed to be treated like an ultra-risky bank share. That saw Zip shares fall more than 70% from ~$4.48 in February to $1.05 by mid-March. Afterpay shares also cratered, falling nearly 80% from around $40 in February to under $9 in March.

But since then, the sentiment has seismically shifted. After investors realised that (partly thanks to government assistance) Zip’s customers were not all about to default on their debts, the Zip share price rebounded in dramatic fashion. Between 19 March and 26 March, Zip shares were up more than 30%.

And then investors realised that the coronavirus pandemic might actually be helping payments companies like Zip Co. Cash as a payment method was already declining in popularity pre-COVID. But with cash usage presenting some hygiene issues during the lockdowns, customers turned to cashless solutions like Zip more than ever.

In fact, last month Zip reported that its revenue was up an astonishing 81% in April 2020. It also reported customer numbers were up 66%.

Is it too late to buy?

I don’t find a lot to like at the current Zip Co share price. Despite Zip being a great growth story, I think there might be a little bit of euphoria going for this company.

I do think  Zip Co deserves a ‘high growth’ share price. But I don’t consider investing in a company after a 500% gain in 3 months a great idea. BNPL payments shares like Afterpay and Zip are highly volatile, and so I think a better strategy is to wait for a dip to pick some shares up, rather than chasing the gains of the past 2 months at today’s prices.

More reading

• Why Afterpay, Super Retail, Uniti, & Viva Energy are charging higher
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high
• Afterpay and Zip shares are rocketing higher today: Can they go even higher?
• Is the Altium share price the steal of the century?
• The top ASX growth shares I would buy for the 2020s

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It’s all well and good to decide to buy ASX shares. But so often, investors think they know a company and its associated risks well, only to be caught short later on. Of course, we can’t account for all possible outcomes – you can’t blame anyone investing in Qantas Airways Limited (ASX: QAN) in January 2020 for not seeing the full impacts of the coronavirus pandemic, for instance. But we can take steps to mitigate the possible risks of investing in a business by putting the company under the microscope.

So here are 3 ‘checks’ I like to go through in a business before I decide if an investment is worthwhile and risk-averse enough.

1) Debt

One thing you can’t take with a pinch of salt when investing is a company’s debt levels. Debt is a major catalyst for companies going into bankruptcy, so it pays to consider how much debt a company has before buying its ASX share. Now, some businesses need debt in order to function in its chosen market. It would be almost impossible for a mining company or a real estate investment trust (REIT) to operate without debt, for instance.

But if a company has a mountain of debt that it doesn’t really need, it’s a massive red flag in my books. So when you’re assessing your next potential investment, have a look to see how much debt its carrying and think about how it might manage to service this debt if there was a major economic crisis. A good place to start is the debt-to-equity ratio (D/E) where more debt than equity is a bad thing.

2) How does it sit with its competitors

Ideally, I like to buy shares of a business that dominates its field. The market leader will usually have several advantages going for it, such as brand loyalty and pricing power that stems from this loyalty. In contrast, a lesser competitor will often be throwing money at discounting its products to try and compete, which ends up weakening the business’s long-term strength. I usually try and buy the ASX share with the biggest advantage in an industry. There’s nothing wrong with backing a winner in investing.

3) Are its shares cheap?

This one seems obvious, but too often investors will want to own a company so much that they will pay a price that doesn’t make sense from an investing perspective. Warren Buffett’s right-hand man Charlie Munger once said, “no company, no matter how wonderful, is worth an infinite price”. Wise words from a wise man.

Buying ASX shares in a great company doesn’t equate to a good investment on its own. You also have to make sure there’s a reasonable chance your investment will give you a decent return over the long run, and buying something that’s overvalued greatly reduced the chances of this. So always be careful about how much growth you’re paying for in a share price. If you’re paying a price that is assuming 20 years of high-octane growth, the chances of something going wrong are high.

More reading

• Why MOAT is my favourite ASX ETF
• ASX 200 falls 2%, ASX travel shares drop heavily
• Top brokers name 3 ASX 200 shares to buy next week
• Is the Qantas share price a buy today?
• The smartest ASX shares to invest $10,000 in right now

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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