Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Aegean Airlines S.A. (ATH:AEGN) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Aegean Airlines's Net Debt?
The image below, which you can click on for greater detail, shows that Aegean Airlines had debt of €22.1k at the end of December 2018, a reduction from €31.6m over a year. However, its balance sheet shows it holds €279.7m in cash, so it actually has €279.7m net cash.
A Look At Aegean Airlines's Liabilities
The latest balance sheet data shows that Aegean Airlines had liabilities of €367.7m due within a year, and liabilities of €80.3m falling due after that. Offsetting these obligations, it had cash of €279.7m as well as receivables valued at €128.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €39.9m.
Given Aegean Airlines has a market capitalization of €578.5m, 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. Despite its noteworthy liabilities, Aegean Airlines boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Aegean Airlines has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aegean Airlines's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aegean Airlines 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, Aegean Airlines 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.
We could understand if investors are concerned about Aegean Airlines's liabilities, but we can be reassured by the fact it has has net cash of €280m. And it impressed us with free cash flow of €81m, being 130% of its EBIT. So we are not troubled with Aegean Airlines's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Aegean Airlines's dividend history, without delay!
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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