Is Lojas Renner (BVMF:LREN3) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Lojas Renner S.A. (BVMF:LREN3) does carry debt. But should shareholders be worried about its use of debt?

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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Lojas Renner

How Much Debt Does Lojas Renner Carry?

As you can see below, Lojas Renner had R$3.47b of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has R$5.95b in cash to offset that, meaning it has R$2.48b net cash.

A Look At Lojas Renner's Liabilities

We can see from the most recent balance sheet that Lojas Renner had liabilities of R$7.95b falling due within a year, and liabilities of R$3.65b due beyond that. Offsetting these obligations, it had cash of R$5.95b as well as receivables valued at R$6.26b due within 12 months. So it can boast R$604.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Lojas Renner could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lojas Renner has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Lojas Renner's EBIT launched higher than Elon Musk, gaining a whopping 701% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lojas Renner 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Lojas Renner may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Lojas Renner's free cash flow amounted to 46% 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$2.48b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 701% over the last year. 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. For instance, we've identified 4 warning signs for Lojas Renner that you should be aware of.

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.