Aegean Airlines (ATH:AEGN) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Aegean Airlines S.A. (ATH:AEGN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aegean Airlines

How Much Debt Does Aegean Airlines Carry?

As you can see below, Aegean Airlines had €220.4m of debt at September 2023, down from €337.1m a year prior. But it also has €580.0m in cash to offset that, meaning it has €359.6m net cash.

How Healthy Is Aegean Airlines' Balance Sheet?

The latest balance sheet data shows that Aegean Airlines had liabilities of €991.8m due within a year, and liabilities of €1.99b falling due after that. On the other hand, it had cash of €580.0m and €167.5m worth of receivables due within a year. So it has liabilities totalling €2.24b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €1.07b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Aegean Airlines would likely require a major re-capitalisation if it had to pay its creditors today. Aegean Airlines boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Pleasingly, Aegean Airlines is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 127% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aegean Airlines'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 company can only pay off debt with cold hard cash, not accounting profits. Aegean Airlines 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. Happily for any shareholders, Aegean Airlines actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Aegean Airlines does have more liabilities than liquid assets, it also has net cash of €359.6m. The cherry on top was that in converted 174% of that EBIT to free cash flow, bringing in €383m. So we don't have any problem with Aegean Airlines's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Aegean Airlines .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.