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

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.' 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. We note that Aegean Airlines S.A. (ATH:AEGN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Aegean Airlines Carry?

As you can see below, at the end of December 2024, Aegean Airlines had €383.6m of debt, up from €220.3m a year ago. Click the image for more detail. But on the other hand it also has €738.8m in cash, leading to a €355.2m net cash position.

How Healthy Is Aegean Airlines' Balance Sheet?

The latest balance sheet data shows that Aegean Airlines had liabilities of €900.1m due within a year, and liabilities of €1.47b falling due after that. On the other hand, it had cash of €738.8m and €159.3m worth of receivables due within a year. So its liabilities total €1.48b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's €1.11b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

See our latest analysis for Aegean Airlines

Unfortunately, Aegean Airlines saw its EBIT slide 8.0% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aegean Airlines can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Aegean Airlines 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. 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 €355.2m. And it impressed us with free cash flow of €269m, being 125% of its EBIT. So while Aegean Airlines does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. 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.