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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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

How Much Debt Does Compañía de Minas BuenaventuraA Carry?

The chart below, which you can click on for greater detail, shows that Compañía de Minas BuenaventuraA had US$600.3m in debt in September 2024; about the same as the year before. On the flip side, it has US$457.9m in cash leading to net debt of about US$142.4m.

How Healthy 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$444.0m falling due within a year, and liabilities of US$978.8m due beyond that. Offsetting this, it had US$457.9m in cash and US$255.0m in receivables that were due within 12 months. So its liabilities total US$709.8m more than the combination of its cash and short-term receivables.

Compañía de Minas BuenaventuraA has a market capitalization of US$3.06b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 0.41 times EBITDA, it is initially surprising to see that Compañía de Minas BuenaventuraA's EBIT has low interest coverage of 2.2 times. So one way or the other, it's clear the debt levels are not trivial. We also note that Compañía de Minas BuenaventuraA improved its EBIT from a last year's loss to a positive US$196m. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Looking at the most recent year, Compañía de Minas BuenaventuraA recorded free cash flow of 25% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Compañía de Minas BuenaventuraA's interest cover and conversion of EBIT to free cash flow definitely weigh on it, in our esteem. But its net debt to EBITDA tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that Compañía de Minas BuenaventuraA is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. Be aware that Compañía de Minas BuenaventuraA is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.