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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Reply S.p.A. (BIT:REY) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Reply's Debt?

The image below, which you can click on for greater detail, shows that Reply had debt of €68.6m at the end of December 2024, a reduction from €84.7m over a year. However, it does have €536.5m in cash offsetting this, leading to net cash of €467.9m.

How Healthy Is Reply's Balance Sheet?

We can see from the most recent balance sheet that Reply had liabilities of €971.7m falling due within a year, and liabilities of €356.3m due beyond that. Offsetting these obligations, it had cash of €536.5m as well as receivables valued at €901.0m due within 12 months. So it can boast €109.5m more liquid assets than total liabilities.

Having regard to Reply's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €5.55b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Reply has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Reply

Also good is that Reply grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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.

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. During the last three years, Reply produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Reply has €467.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €301m, being 75% 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.

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.