David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Compañía de Minas BuenaventuraA's Debt?
The chart below, which you can click on for greater detail, shows that Compañía de Minas BuenaventuraA had US$616.8m in debt in December 2023; about the same as the year before. However, because it has a cash reserve of US$219.8m, its net debt is less, at about US$397.0m.
How Healthy Is Compañía de Minas BuenaventuraA's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Compañía de Minas BuenaventuraA had liabilities of US$441.6m due within 12 months and liabilities of US$923.0m due beyond that. Offsetting these obligations, it had cash of US$219.8m as well as receivables valued at US$255.5m due within 12 months. So its liabilities total US$889.3m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Compañía de Minas BuenaventuraA is worth US$4.41b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Compañía de Minas BuenaventuraA's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd 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$25m. 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$12m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. For example, we've discovered 2 warning signs for Compañía de Minas BuenaventuraA that you should be aware of before investing here.
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.