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 is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Compañía de Minas BuenaventuraA
What Is Compañía de Minas BuenaventuraA's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 Compañía de Minas BuenaventuraA had US$730.3m of debt, an increase on US$653.3m, over one year. However, because it has a cash reserve of US$173.5m, its net debt is less, at about US$556.8m.
A Look At Compañía de Minas BuenaventuraA's Liabilities
The latest balance sheet data shows that Compañía de Minas BuenaventuraA had liabilities of US$330.7m due within a year, and liabilities of US$954.4m falling due after that. Offsetting these obligations, it had cash of US$173.5m as well as receivables valued at US$282.9m due within 12 months. So it has liabilities totalling US$828.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Compañía de Minas BuenaventuraA has a market capitalization of US$1.68b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.
Over 12 months, Compañía de Minas BuenaventuraA made a loss at the EBIT level, and saw its revenue drop to US$777m, which is a fall of 18%. That's not what we would hope to see.
Caveat Emptor
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). Indeed, it lost US$74m at the EBIT level. 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$103m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. 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 , you should know about...
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.