Is Aegean Airlines (ATH:AEGN) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Aegean Airlines S.A. (ATH:AEGN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aegean Airlines

How Much Debt Does Aegean Airlines Carry?

You can click the graphic below for the historical numbers, but it shows that Aegean Airlines had €356.9m of debt in December 2021, down from €463.8m, one year before. But it also has €454.9m in cash to offset that, meaning it has €98.0m net cash.

How Strong Is Aegean Airlines' Balance Sheet?

The latest balance sheet data shows that Aegean Airlines had liabilities of €568.1m due within a year, and liabilities of €758.7m falling due after that. Offsetting this, it had €454.9m in cash and €91.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €780.2m.

This deficit casts a shadow over the €499.5m 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. 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.

Notably, Aegean Airlines made a loss at the EBIT level, last year, but improved that to positive EBIT of €30m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aegean Airlines can strengthen its balance sheet over time. 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 year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Aegean Airlines does have more liabilities than liquid assets, it also has net cash of €98.0m. The cherry on top was that in converted 625% of that EBIT to free cash flow, bringing in €188m. So although we see some areas for improvement, we're not too worried about Aegean Airlines's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Aegean Airlines that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.