Health Check: How Prudently Does Aegean Airlines (ATH:AEGN) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Aegean Airlines S.A. (ATH:AEGN) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aegean Airlines

What Is Aegean Airlines's Net Debt?

As you can see below, Aegean Airlines had €148.3m of debt at September 2020, down from €196.8m a year prior. However, its balance sheet shows it holds €421.3m in cash, so it actually has €273.0m net cash.

How Healthy Is Aegean Airlines' Balance Sheet?

We can see from the most recent balance sheet that Aegean Airlines had liabilities of €681.4m falling due within a year, and liabilities of €592.4m due beyond that. Offsetting this, it had €421.3m in cash and €82.8m in receivables that were due within 12 months. So its liabilities total €769.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €324.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Aegean Airlines would probably need a major re-capitalization if its creditors were to demand repayment. Given that Aegean Airlines has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Aegean Airlines had a loss before interest and tax, and actually shrunk its revenue by 51%, to €638m. To be frank that doesn't bode well.

So How Risky Is Aegean Airlines?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aegean Airlines had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €82m of cash and made a loss of €186m. With only €273.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Aegean Airlines has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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