David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Compañía de Minas BuenaventuraA
What Is Compañía de Minas BuenaventuraA's Net Debt?
The chart below, which you can click on for greater detail, shows that Compañía de Minas BuenaventuraA had US$622.4m in debt in September 2023; about the same as the year before. However, it also had US$221.8m in cash, and so its net debt is US$400.6m.
How Healthy Is Compañía de Minas BuenaventuraA's Balance Sheet?
According to the last reported balance sheet, Compañía de Minas BuenaventuraA had liabilities of US$373.9m due within 12 months, and liabilities of US$921.4m due beyond 12 months. On the other hand, it had cash of US$221.8m and US$197.0m worth of receivables due within a year. So its liabilities total US$876.5m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Compañía de Minas BuenaventuraA is worth US$3.67b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Compañía de Minas BuenaventuraA'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.
Over 12 months, Compañía de Minas BuenaventuraA saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months Compañía de Minas BuenaventuraA produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$40m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$18m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Compañía de Minas BuenaventuraA you should know about.
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.
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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.