We Think Compañía de Minas BuenaventuraA (NYSE:BVN) Has A Fair Chunk Of Debt

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. Importantly, Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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 June 2022 Compañía de Minas BuenaventuraA had debt of US$648.6m, up from US$452.5m in one year. However, because it has a cash reserve of US$326.3m, its net debt is less, at about US$322.3m.

How Strong Is Compañía de Minas BuenaventuraA's Balance Sheet?

The latest balance sheet data shows that Compañía de Minas BuenaventuraA had liabilities of US$317.4m due within a year, and liabilities of US$994.9m falling due after that. Offsetting this, it had US$326.3m in cash and US$160.4m in receivables that were due within 12 months. So its liabilities total US$825.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$1.35b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 made a loss at the EBIT level, and saw its revenue drop to US$857m, which is a fall of 3.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Compañía de Minas BuenaventuraA produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$14m. 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. However, it doesn't help that it burned through US$411m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. 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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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.