Is Aegis Logistics (NSE:AEGISCHEM) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Aegis Logistics Limited (NSE:AEGISCHEM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aegis Logistics

What Is Aegis Logistics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Aegis Logistics had debt of ₹13.9b, up from ₹6.88b in one year. But it also has ₹17.4b in cash to offset that, meaning it has ₹3.59b net cash.

A Look At Aegis Logistics' Liabilities

We can see from the most recent balance sheet that Aegis Logistics had liabilities of ₹6.60b falling due within a year, and liabilities of ₹23.6b due beyond that. Offsetting these obligations, it had cash of ₹17.4b as well as receivables valued at ₹3.99b due within 12 months. So its liabilities total ₹8.72b more than the combination of its cash and short-term receivables.

Given Aegis Logistics has a market capitalization of ₹115.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aegis Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Aegis Logistics has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aegis Logistics 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. During the last three years, Aegis Logistics burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Aegis Logistics has ₹3.59b in net cash. And it impressed us with its EBIT growth of 57% over the last year. So we are not troubled with Aegis Logistics's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Aegis Logistics that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.