We Think Reply (BIT:REY) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Reply

What Is Reply's Debt?

As you can see below, Reply had €31.9m of debt at December 2020, down from €43.9m a year prior. But it also has €335.6m in cash to offset that, meaning it has €303.8m net cash.

A Look At Reply's Liabilities

According to the last reported balance sheet, Reply had liabilities of €565.4m due within 12 months, and liabilities of €265.2m due beyond 12 months. On the other hand, it had cash of €335.6m and €424.7m worth of receivables due within a year. So it has liabilities totalling €70.3m more than its cash and near-term receivables, combined.

Having regard to Reply's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €4.16b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Reply boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Reply has increased its EBIT by 7.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Reply has €303.8m in net cash. And it impressed us with free cash flow of €213m, being 108% of its EBIT. So we don't think Reply's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Reply's earnings per share history for free.

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. 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.
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