These 4 Measures Indicate That Reply (BIT:REY) 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. We can see that Reply S.p.A. (BIT:REY) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

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 €26.4m at the end of June 2021, a reduction from €41.5m over a year. But it also has €331.3m in cash to offset that, meaning it has €304.9m net cash.

How Strong Is Reply's Balance Sheet?

The latest balance sheet data shows that Reply had liabilities of €499.8m due within a year, and liabilities of €262.3m falling due after that. Offsetting this, it had €331.3m in cash and €336.2m in receivables that were due within 12 months. So its liabilities total €94.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Reply's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €6.66b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Reply also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Reply grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Reply'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. 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. Happily for any shareholders, Reply actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Reply's liabilities, but we can be reassured by the fact it has has net cash of €304.9m. And it impressed us with free cash flow of €217m, being 105% of its EBIT. So is Reply's debt a risk? It doesn't seem so to us. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.