Is Compañía de Minas BuenaventuraA (NYSE:BVN) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does use debt in its business. But should shareholders be worried about its use of debt?

We've discovered 2 warning signs about Compañía de Minas BuenaventuraA. View them for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.

What Is Compañía de Minas BuenaventuraA's Debt?

You can click the graphic below for the historical numbers, but it shows that Compañía de Minas BuenaventuraA had US$546.2m of debt in December 2024, down from US$616.8m, one year before. However, it does have US$478.4m in cash offsetting this, leading to net debt of about US$67.7m.

A Look At Compañía de Minas BuenaventuraA's Liabilities

We can see from the most recent balance sheet that Compañía de Minas BuenaventuraA had liabilities of US$479.7m falling due within a year, and liabilities of US$1.01b due beyond that. Offsetting this, it had US$478.4m in cash and US$258.2m in receivables that were due within 12 months. So its liabilities total US$751.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Compañía de Minas BuenaventuraA has a market capitalization of US$3.54b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

See our latest analysis for Compañía de Minas BuenaventuraA

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt sitting at just 0.18 times EBITDA, Compañía de Minas BuenaventuraA is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 7.3 times the interest expense over the last year. Although Compañía de Minas BuenaventuraA made a loss at the EBIT level, last year, it was also good to see that it generated US$233m in EBIT over the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, Compañía de Minas BuenaventuraA recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Compañía de Minas BuenaventuraA's net debt to EBITDA suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Looking at all the aforementioned factors together, it strikes us that Compañía de Minas BuenaventuraA can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Compañía de Minas BuenaventuraA that you should be aware of.

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.