These 4 metrics indicate that Lojas Renner (BVMF:LREN3) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Lojas Renner S.A. (BVMF:LREN3) uses debt. But does this debt worry shareholders?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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.
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What is Lojas Renner’s net debt?
The graph below, which you can click on for more details, shows that Lojas Renner had a debt of 3.44 billion reais in June 2022; about the same as the previous year. However, he has 4.72 billion reais in cash to offset this, resulting in a net cash of 1.28 billion reais.
A look at Lojas Renner’s responsibilities
Zooming in on the latest balance sheet data, we can see that Lojas Renner had liabilities of R$7.88 billion due within 12 months and liabilities of R$3.42 billion due beyond. In compensation for these obligations, it had cash of R$4.72 billion as well as receivables valued at R$6.66 billion maturing within 12 months. These liquid assets therefore roughly correspond to the total liabilities.
This state of affairs indicates that Lojas Renner’s balance sheet looks quite strong, since its total liabilities are roughly equal to its cash. So while it’s hard to imagine the 28.3 billion reais company fighting for cash, we still think it’s worth keeping an eye on its balance sheet. Simply put, the fact that Lojas Renner has more cash than debt is arguably a good indication that she can safely manage her debt.
We also note that Lojas Renner improved its EBIT from last year’s loss to a positive result of R$1.2 billion. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Lojas Renner can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Lojas Renner has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past year, Lojas Renner has generated free cash flow amounting to a very strong 84% of its EBIT, more than expected. This positions him well to pay off debt if desired.
While we sympathize with investors who find debt a concern, you should bear in mind that Lojas Renner has a net cash position of R$1.28 billion, as well as more liquid assets than liabilities. The icing on the cake was to convert 84% of this EBIT into free cash flow, bringing in 1.0 billion reais. So we don’t think Lojas Renner’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example – Lojas Renner has 2 warning signs we think you should know.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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Find out if Lojas Renner is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.