Here's Why Lojas Renner (BVMF:LREN3) Can Manage Its Debt Responsibly

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. We can see that Lojas Renner S.A. (BVMF:LREN3) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lojas Renner

What Is Lojas Renner's Debt?

You can click the graphic below for the historical numbers, but it shows that Lojas Renner had R$2.33b of debt in June 2023, down from R$3.44b, one year before. But on the other hand it also has R$2.90b in cash, leading to a R$574.9m net cash position.

A Look At Lojas Renner's Liabilities

According to the last reported balance sheet, Lojas Renner had liabilities of R$6.84b due within 12 months, and liabilities of R$3.41b due beyond 12 months. Offsetting these obligations, it had cash of R$2.90b as well as receivables valued at R$6.85b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$491.4m.

Given Lojas Renner has a market capitalization of R$12.9b, 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. While it does have liabilities worth noting, Lojas Renner also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Lojas Renner's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Lojas Renner'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lojas Renner 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 two years, Lojas Renner recorded free cash flow worth 73% 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

We could understand if investors are concerned about Lojas Renner's liabilities, but we can be reassured by the fact it has has net cash of R$574.9m. And it impressed us with free cash flow of R$694m, being 73% of its EBIT. So we are not troubled with Lojas Renner's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Lojas Renner you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.