Aegis Logistics (NSE:AEGISCHEM) Has A Rock Solid Balance Sheet

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. We can see that Aegis Logistics Limited (NSE:AEGISCHEM) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Aegis Logistics

How Much Debt Does Aegis Logistics Carry?

As you can see below, at the end of March 2021, Aegis Logistics had ₹3.15b of debt, up from ₹2.53b a year ago. Click the image for more detail. But it also has ₹3.68b in cash to offset that, meaning it has ₹531.6m net cash.

A Look At Aegis Logistics' Liabilities

We can see from the most recent balance sheet that Aegis Logistics had liabilities of ₹5.06b falling due within a year, and liabilities of ₹5.31b due beyond that. Offsetting these obligations, it had cash of ₹3.68b as well as receivables valued at ₹941.5m due within 12 months. So its liabilities total ₹5.75b more than the combination of its cash and short-term receivables.

Of course, Aegis Logistics has a market capitalization of ₹124.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Aegis Logistics also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Aegis Logistics has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aegis Logistics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aegis Logistics 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. During the last three years, Aegis Logistics produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Aegis Logistics has ₹531.6m in net cash. And it impressed us with its EBIT growth of 51% over the last year. So we don't think Aegis Logistics's use of debt is risky. 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. For example - Aegis Logistics has 2 warning signs we think 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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