We Think Aegean Airlines (ATH:AEGN) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aegean Airlines

What Is Aegean Airlines's Debt?

You can click the graphic below for the historical numbers, but it shows that Aegean Airlines had €197.7m of debt in March 2023, down from €344.8m, one year before. 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. On the other hand, it had cash of €497.5m and €106.0m worth of receivables due within a year. So it has liabilities totalling €1.97b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €1.14b 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. 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.

Better yet, Aegean Airlines grew its EBIT by 484% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last two years, Aegean Airlines actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Aegean Airlines's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €299.8m. The cherry on top was that in converted 334% of that EBIT to free cash flow, bringing in €446m. So we don't have any problem with Aegean Airlines's use of debt. We'd be motivated to research the stock further if we found out that Aegean Airlines insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.