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.' 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. We can see that Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does use debt in its business. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Compañía de Minas BuenaventuraA Carry?
As you can see below, Compañía de Minas BuenaventuraA had US$480.9m of debt at September 2020, down from US$618.3m a year prior. On the flip side, it has US$264.8m in cash leading to net debt of about US$216.0m.
A Look At Compañía de Minas BuenaventuraA's Liabilities
According to the last reported balance sheet, Compañía de Minas BuenaventuraA had liabilities of US$431.6m due within 12 months, and liabilities of US$672.9m due beyond 12 months. Offsetting this, it had US$264.8m in cash and US$192.3m in receivables that were due within 12 months. So it has liabilities totalling US$647.4m more than its cash and near-term receivables, combined.
Compañía de Minas BuenaventuraA has a market capitalization of US$2.97b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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.
In the last year Compañía de Minas BuenaventuraA had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$676m. To be frank that doesn't bode well.
Not only did Compañía de Minas BuenaventuraA's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$53m. 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. For example, we would not want to see a repeat of last year's loss of US$121m. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Compañía de Minas BuenaventuraA's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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