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. 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 note that Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Compañía de Minas BuenaventuraA’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Compañía de Minas BuenaventuraA had US$618.3m of debt, an increase on US$141.3m, over one year. However, it does have US$279.7m in cash offsetting this, leading to net debt of about US$338.6m.
How Strong Is Compañía de Minas BuenaventuraA’s Balance Sheet?
We can see from the most recent balance sheet that Compañía de Minas BuenaventuraA had liabilities of US$377.1m falling due within a year, and liabilities of US$711.7m due beyond that. Offsetting these obligations, it had cash of US$279.7m as well as receivables valued at US$232.4m due within 12 months. So its liabilities total US$576.7m more than the combination of its cash and short-term receivables.
Of course, Compañía de Minas BuenaventuraA has a market capitalization of US$3.13b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Compañía de Minas BuenaventuraA’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.
Over 12 months, Compañía de Minas BuenaventuraA made a loss at the EBIT level, and saw its revenue drop to US$901m, which is a fall of 29%. That makes us nervous, to say the least.
While Compañía de Minas BuenaventuraA’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$82m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$22m into a profit. So to be blunt we do think it 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, we’ve discovered 1 warning sign for Compañía de Minas BuenaventuraA that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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