Is Lojas Renner (BVMF:LREN3) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lojas Renner S.A. (BVMF:LREN3) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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

How Much Debt Does Lojas Renner Carry?

As you can see below, Lojas Renner had R$3.69b of debt at March 2022, down from R$3.85b a year prior. But on the other hand it also has R$5.66b in cash, leading to a R$1.97b net cash position.

How Strong Is Lojas Renner's Balance Sheet?

The latest balance sheet data shows that Lojas Renner had liabilities of R$7.83b due within a year, and liabilities of R$3.61b falling due after that. On the other hand, it had cash of R$5.66b and R$6.02b worth of receivables due within a year. So it actually has R$237.2m more liquid assets than total liabilities.

This state of affairs indicates that Lojas Renner'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 R$24.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Lojas Renner boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Lojas Renner improved its EBIT from a last year's loss to a positive R$1.1b. 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 Lojas Renner can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. In the last year, Lojas Renner's free cash flow amounted to 24% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lojas Renner has net cash of R$1.97b, as well as more liquid assets than liabilities. So we don't have any problem with Lojas Renner's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Lojas Renner .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.