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

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. As with many other companies Lojas Renner S.A. (BVMF:LREN3) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Lojas Renner had R$3.44b in debt in June 2022; about the same as the year before. However, it does have R$4.72b in cash offsetting this, leading to net cash of R$1.28b.

A Look At Lojas Renner's Liabilities

Zooming in on the latest balance sheet data, we can see that Lojas Renner had liabilities of R$7.88b due within 12 months and liabilities of R$3.42b due beyond that. Offsetting these obligations, it had cash of R$4.72b as well as receivables valued at R$6.66b due within 12 months. So these liquid assets roughly match the 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 while it's hard to imagine that the R$28.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Lojas Renner has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Lojas Renner improved its EBIT from a last year's loss to a positive R$1.2b. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last year, Lojas Renner generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lojas Renner has net cash of R$1.28b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in R$1.0b. So we don't think Lojas Renner's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Lojas Renner has 2 warning signs we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.