Does Compañía de Minas BuenaventuraA (NYSE:BVN) Have A Healthy Balance Sheet?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. We can see that Compañía de Minas Buenaventura S.A.A. (NYSE:BVN) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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 step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Compañía de Minas BuenaventuraA
How Much Debt Does Compañía de Minas BuenaventuraA Carry?
You can click the graphic below for the historical numbers, but it shows that Compañía de Minas BuenaventuraA had US$452.5m of debt in June 2021, down from US$606.2m, one year before. However, it also had US$255.2m in cash, and so its net debt is US$197.3m.
How Strong Is Compañía de Minas BuenaventuraA’s Balance Sheet?
According to the last reported balance sheet, Compañía de Minas BuenaventuraA had liabilities of US$458.5m due within 12 months, and liabilities of US$685.3m due beyond 12 months. On the other hand, it had cash of US$255.2m and US$242.1m worth of receivables due within a year. So its liabilities total US$646.5m 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$1.85b, and thus could probably raise enough capital to shore up 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Compañía de Minas BuenaventuraA has a very low debt to EBITDA ratio of 0.97 so it is strange to see weak interest coverage, with last year’s EBIT being only 0.58 times the interest expense. So while we’re not necessarily alarmed we think that its debt is far from trivial. We also note that Compañía de Minas BuenaventuraA improved its EBIT from a last year’s loss to a positive US$13m. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Compañía de Minas BuenaventuraA actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
Compañía de Minas BuenaventuraA’s interest cover was a real negative on this analysis, although the other factors we considered were considerably better. There’s no doubt that its ability to to convert EBIT to free cash flow is pretty flash. When we consider all the elements mentioned above, it seems to us that Compañía de Minas BuenaventuraA is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Case in point: We’ve spotted 1 warning sign for Compañía de Minas BuenaventuraA you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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