Lojas Renner (BVMF:LREN3) Has A Rock Solid Balance Sheet

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 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 note that Lojas Renner S.A. (BVMF:LREN3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$1.19b of debt in September 2024, down from R$2.16b, one year before. But it also has R$2.58b in cash to offset that, meaning it has R$1.39b net cash.

How Healthy Is Lojas Renner's Balance Sheet?

According to the last reported balance sheet, Lojas Renner had liabilities of R$6.83b due within 12 months, and liabilities of R$1.95b due beyond 12 months. On the other hand, it had cash of R$2.58b and R$6.51b worth of receivables due within a year. So it actually has R$311.3m more liquid assets than total liabilities.

Having regard to Lojas Renner's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the R$15.8b 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!

In addition to that, we're happy to report that Lojas Renner has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. 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 last three years, Lojas Renner recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lojas Renner has R$1.39b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of R$1.8b, being 97% of its EBIT. So is Lojas Renner's debt a risk? It doesn't seem so to us. 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 example - Lojas Renner has 1 warning sign we think you should be aware of.

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.