Does Sea (NYSE:SE) Have A Healthy Balance Sheet?

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.' 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 Sea Limited (NYSE:SE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

Our analysis indicates that SE is potentially overvalued!

How Much Debt Does Sea Carry?

As you can see below, at the end of June 2022, Sea had US$4.18b of debt, up from US$1.28b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$7.78b in cash, so it actually has US$3.60b net cash.

How Healthy Is Sea's Balance Sheet?

The latest balance sheet data shows that Sea had liabilities of US$6.74b due within a year, and liabilities of US$5.29b falling due after that. Offsetting these obligations, it had cash of US$7.78b as well as receivables valued at US$2.30b due within 12 months. So it has liabilities totalling US$1.96b more than its cash and near-term receivables, combined.

Since publicly traded Sea shares are worth a very impressive total of US$27.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sea also has more cash than debt, so we're pretty confident it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sea reported revenue of US$12b, which is a gain of 72%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 the fact is that over the last twelve months Sea lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.3b and booked a US$2.7b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$3.60b. That means it could keep spending at its current rate for more than two years. Sea's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 1 warning sign for Sea that you should be aware of.

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.