We Think Aegis Logistics (NSE:AEGISCHEM) 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, Aegis Logistics Limited (NSE:AEGISCHEM) does carry 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Aegis Logistics

What Is Aegis Logistics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Aegis Logistics had ₹6.88b of debt, an increase on ₹3.35b, over one year. But it also has ₹13.1b in cash to offset that, meaning it has ₹6.21b net cash.

A Look At Aegis Logistics' Liabilities

We can see from the most recent balance sheet that Aegis Logistics had liabilities of ₹10.1b falling due within a year, and liabilities of ₹15.6b due beyond that. Offsetting these obligations, it had cash of ₹13.1b as well as receivables valued at ₹3.98b due within 12 months. So it has liabilities totalling ₹8.62b more than its cash and near-term receivables, combined.

Given Aegis Logistics has a market capitalization of ₹125.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

And we also note warmly that Aegis Logistics grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept 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 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

We could understand if investors are concerned about Aegis Logistics's liabilities, but we can be reassured by the fact it has has net cash of ₹6.21b. On top of that, it increased its EBIT by 14% in the last twelve months. So we are not troubled with Aegis Logistics's debt use. 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. We've identified 3 warning signs with Aegis Logistics (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.