Is Reply (BIT:REY) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Reply S.p.A. (BIT:REY) does carry debt. But is this debt a concern to shareholders?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Reply

What Is Reply's Net Debt?

The image below, which you can click on for greater detail, shows that Reply had debt of €70.6m at the end of June 2024, a reduction from €98.6m over a year. However, it does have €432.2m in cash offsetting this, leading to net cash of €361.7m.

A Look At Reply's Liabilities

Zooming in on the latest balance sheet data, we can see that Reply had liabilities of €837.8m due within 12 months and liabilities of €308.4m due beyond that. On the other hand, it had cash of €432.2m and €587.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €126.6m.

Given Reply has a market capitalization of €5.11b, 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. Despite its noteworthy liabilities, Reply boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Reply grew its EBIT by 3.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Reply 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 Reply 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. Over the most recent three years, Reply recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Reply has €361.7m in net cash. And it impressed us with free cash flow of €224m, being 68% of its EBIT. So we don't think Reply's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Reply, you may well want to click here to check an interactive graph of its earnings per share history.

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.