Is Aegean Airlines (ATH:AEGN) Using Too Much 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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Aegean Airlines

How Much Debt Does Aegean Airlines Carry?

The image below, which you can click on for greater detail, shows that Aegean Airlines had debt of €197.7m at the end of March 2023, a reduction from €344.8m over a year. But on the other hand it also has €497.5m in cash, leading to a €299.8m net cash position.

How Strong Is Aegean Airlines' Balance Sheet?

We can see from the most recent balance sheet that Aegean Airlines had liabilities of €698.1m falling due within a year, and liabilities of €1.88b due beyond that. Offsetting these obligations, it had cash of €497.5m as well as receivables valued at €106.0m due within 12 months. So it has liabilities totalling €1.97b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €793.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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.

Notably, Aegean Airlines's EBIT launched higher than Elon Musk, gaining a whopping 484% on last year. 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.

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 two years. 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 €299.8m. And it impressed us with free cash flow of €324m, being 276% of its EBIT. So we don't have any problem with Aegean Airlines's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Aegean Airlines insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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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.