Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Sea Limited (NYSE:SE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Sea Carry?
The image below, which you can click on for greater detail, shows that Sea had debt of US$3.47b at the end of March 2023, a reduction from US$4.18b over a year. But on the other hand it also has US$6.59b in cash, leading to a US$3.12b net cash position.
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How Healthy Is Sea's Balance Sheet?
According to the last reported balance sheet, Sea had liabilities of US$6.66b due within 12 months, and liabilities of US$4.39b due beyond 12 months. Offsetting these obligations, it had cash of US$6.59b as well as receivables valued at US$2.25b due within 12 months. So it has liabilities totalling US$2.22b more than its cash and near-term receivables, combined.
Of course, Sea has a titanic market capitalization of US$32.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sea boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sea 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 Sea wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$13b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Sea?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sea had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$804m and booked a US$984m accounting loss. But the saving grace is the US$3.12b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Sea I always like to keep an eye on the long term profit and revenue trends.
Source: Yahoo Finance
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