We Think Lojas Renner (BVMF:LREN3) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Lojas Renner S.A. (BVMF:LREN3) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lojas Renner

What Is Lojas Renner's Debt?

The image below, which you can click on for greater detail, shows that Lojas Renner had debt of R$1.41b at the end of March 2024, a reduction from R$2.39b over a year. But it also has R$2.43b in cash to offset that, meaning it has R$1.02b net cash.

How Strong Is Lojas Renner's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lojas Renner had liabilities of R$6.56b due within 12 months and liabilities of R$2.39b due beyond that. On the other hand, it had cash of R$2.43b and R$6.26b worth of receivables due within a year. So it has liabilities totalling R$252.0m more than its cash and near-term receivables, combined.

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$12.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Lojas Renner also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Lojas Renner's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. During the last three years, 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

We could understand if investors are concerned about Lojas Renner's liabilities, but we can be reassured by the fact it has has net cash of R$1.02b. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in R$2.2b. So we don't have any problem with Lojas Renner's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Lojas Renner , and understanding them should be part of your investment process.

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.

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