Is SeaWorld Entertainment (NYSE:SEAS) Using Too Much Debt?

By
Simply Wall St
Published
January 13, 2022
NYSE:SEAS
Source: Shutterstock

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 note that SeaWorld Entertainment, Inc. (NYSE:SEAS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SeaWorld Entertainment

What Is SeaWorld Entertainment's Net Debt?

The chart below, which you can click on for greater detail, shows that SeaWorld Entertainment had US$2.12b in debt in September 2021; about the same as the year before. However, because it has a cash reserve of US$553.6m, its net debt is less, at about US$1.56b.

debt-equity-history-analysis
NYSE:SEAS Debt to Equity History January 13th 2022

How Healthy Is SeaWorld Entertainment's Balance Sheet?

The latest balance sheet data shows that SeaWorld Entertainment had liabilities of US$406.8m due within a year, and liabilities of US$2.29b falling due after that. Offsetting this, it had US$553.6m in cash and US$86.5m in receivables that were due within 12 months. So its liabilities total US$2.06b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since SeaWorld Entertainment has a market capitalization of US$5.09b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

SeaWorld Entertainment's debt is 3.3 times its EBITDA, and its EBIT cover its interest expense 2.7 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. One redeeming factor for SeaWorld Entertainment is that it turned last year's EBIT loss into a gain of US$330m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SeaWorld Entertainment 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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, SeaWorld Entertainment recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

When it comes to the balance sheet, the standout positive for SeaWorld Entertainment was the fact that it seems able to convert EBIT to free cash flow confidently. However, our other observations weren't so heartening. To be specific, it seems about as good at covering its interest expense with its EBIT as wet socks are at keeping your feet warm. When we consider all the factors mentioned above, we do feel a bit cautious about SeaWorld Entertainment's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with SeaWorld Entertainment (including 1 which is a bit concerning) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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