We Think Agilysys (NASDAQ:AGYS) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Agilysys, Inc. (NASDAQ:AGYS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about Agilysys. View them for free.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Agilysys Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Agilysys had debt of US$38.0m, up from none in one year. But it also has US$60.8m in cash to offset that, meaning it has US$22.8m net cash.

A Look At Agilysys' Liabilities

According to the last reported balance sheet, Agilysys had liabilities of US$115.0m due within 12 months, and liabilities of US$72.1m due beyond 12 months. Offsetting these obligations, it had cash of US$60.8m as well as receivables valued at US$53.3m due within 12 months. So its liabilities total US$73.0m more than the combination of its cash and short-term receivables.

Of course, Agilysys has a market capitalization of US$1.95b, 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, Agilysys also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for Agilysys

In addition to that, we're happy to report that Agilysys has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Agilysys 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. While Agilysys 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. 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$22.8m in net cash. And it impressed us with free cash flow of US$55m, being 195% of its EBIT. So we don't think Agilysys's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Agilysys .

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.