Is Sea (NYSE:SE) Using Debt Sensibly?

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 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. Importantly, Sea Limited (NYSE:SE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sea

What Is Sea's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Sea had debt of US$4.23b, up from US$3.50b in one year. However, it does have US$7.30b in cash offsetting this, leading to net cash of US$3.07b.

How Strong Is Sea's Balance Sheet?

The latest balance sheet data shows that Sea had liabilities of US$7.05b due within a year, and liabilities of US$5.27b falling due after that. Offsetting these obligations, it had cash of US$7.30b as well as receivables valued at US$2.39b due within 12 months. So its liabilities total US$2.64b more than the combination of its cash and short-term receivables.

Since publicly traded Sea shares are worth a very impressive total of US$36.1b, 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Sea wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to US$12b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sea?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sea had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$2.5b of cash and made a loss of US$2.7b. While this does make the company a bit risky, it's important to remember it has net cash of US$3.07b. 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. 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.

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.