These 4 Measures Indicate That Agilysys (NASDAQ:AGYS) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Agilysys, Inc. (NASDAQ:AGYS) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Agilysys

What Is Agilysys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Agilysys had US$50.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$54.9m in cash, so it actually has US$4.89m net cash.

How Strong Is Agilysys' Balance Sheet?

According to the last reported balance sheet, Agilysys had liabilities of US$95.9m due within 12 months, and liabilities of US$85.9m due beyond 12 months. Offsetting this, it had US$54.9m in cash and US$36.2m in receivables that were due within 12 months. So it has liabilities totalling US$90.7m more than its cash and near-term receivables, combined.

Given Agilysys has a market capitalization of US$3.83b, it's hard to believe these liabilities pose much threat. 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, Agilysys also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Agilysys grew its EBIT by 106% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Agilysys'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. Agilysys 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. Happily for any shareholders, Agilysys actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Agilysys has US$4.89m in net cash. The cherry on top was that in converted 197% of that EBIT to free cash flow, bringing in US$47m. So we don't think Agilysys'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. Case in point: We've spotted 4 warning signs for Agilysys you should be aware of, and 2 of them are significant.

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.