Aegis Logistics (NSE:AEGISCHEM) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Aegis Logistics Limited (NSE:AEGISCHEM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aegis Logistics

How Much Debt Does Aegis Logistics Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Aegis Logistics had debt of ₹3.35b, up from ₹2.28b in one year. However, it does have ₹3.54b in cash offsetting this, leading to net cash of ₹197.4m.

How Strong Is Aegis Logistics' Balance Sheet?

We can see from the most recent balance sheet that Aegis Logistics had liabilities of ₹4.57b falling due within a year, and liabilities of ₹5.14b due beyond that. On the other hand, it had cash of ₹3.54b and ₹1.02b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.14b.

Of course, Aegis Logistics has a market capitalization of ₹74.6b, 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. Despite its noteworthy liabilities, Aegis Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Aegis Logistics grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aegis Logistics 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. 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. In the last three years, Aegis Logistics's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Aegis Logistics has ₹197.4m in net cash. And we liked the look of last year's 29% year-on-year EBIT growth. So is Aegis Logistics's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Aegis Logistics has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.