These 4 Measures Indicate That Lojas Renner (BVMF:LREN3) Is Using Debt Extensively

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 is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lojas Renner

What Is Lojas Renner's Debt?

As you can see below, Lojas Renner had R$3.39b of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have R$5.61b in cash offsetting this, leading to net cash of R$2.23b.

How Healthy Is Lojas Renner's Balance Sheet?

We can see from the most recent balance sheet that Lojas Renner had liabilities of R$4.38b falling due within a year, and liabilities of R$5.03b due beyond that. Offsetting these obligations, it had cash of R$5.61b as well as receivables valued at R$4.70b due within 12 months. So it can boast R$910.8m 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.

Shareholders should be aware that Lojas Renner's EBIT was down 67% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Lojas Renner reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Lojas Renner has net cash of R$2.23b, as well as more liquid assets than liabilities. So while Lojas Renner does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Lojas Renner that you should be aware of before investing here.

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.
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