Is Sea (NYSE:SE) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Sea Limited (NYSE:SE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sea

What Is Sea's Debt?

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. However, it does have US$6.59b in cash offsetting this, leading to net cash of US$3.12b.

How Strong 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.

Since publicly traded Sea shares are worth a very impressive total of US$34.7b, 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. 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 Sea'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.

Over 12 months, Sea reported revenue of US$13b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sea?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Sea lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$804m of cash and made a loss of US$984m. 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. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Sea I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.