Is Compañía de Minas BuenaventuraA (NYSE:BVN) Using Too Much Debt?

Simply Wall St
January 28, 2022
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Compañía de Minas BuenaventuraA

What Is Compañía de Minas BuenaventuraA's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Compañía de Minas BuenaventuraA had debt of US$998.1m, up from US$484.5m in one year. However, it also had US$287.9m in cash, and so its net debt is US$710.2m.

NYSE:BVN Debt to Equity History January 28th 2022

A Look At Compañía de Minas BuenaventuraA's Liabilities

Zooming in on the latest balance sheet data, we can see that Compañía de Minas BuenaventuraA had liabilities of US$457.2m due within 12 months and liabilities of US$1.23b due beyond that. Offsetting this, it had US$287.9m in cash and US$213.8m in receivables that were due within 12 months. So it has liabilities totalling US$1.18b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Compañía de Minas BuenaventuraA is worth US$2.07b, and thus could probably raise enough capital to shore up 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Compañía de Minas BuenaventuraA can strengthen its balance sheet over time. 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 reported revenue of US$883m, which is a gain of 31%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Compañía de Minas BuenaventuraA's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$428m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Compañía de Minas BuenaventuraA , and understanding them should be part of your investment process.

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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