Is Sea (NYSE:SE) Using Too Much Debt?

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. As with many other companies Sea Limited (NYSE:SE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sea

How Much Debt Does Sea Carry?

As you can see below, at the end of March 2022, Sea had US$4.18b of debt, up from US$1.76b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$8.80b in cash, so it actually has US$4.63b net cash.

How Strong Is Sea's Balance Sheet?

According to the last reported balance sheet, Sea had liabilities of US$6.85b due within 12 months, and liabilities of US$5.19b due beyond 12 months. Offsetting these obligations, it had cash of US$8.80b as well as receivables valued at US$2.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.12b.

Since publicly traded Sea shares are worth a very impressive total of US$38.7b, 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sea reported revenue of US$11b, which is a gain of 104%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Sea?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sea had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$1.6b and booked a US$2.2b accounting loss. But the saving grace is the US$4.63b on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Sea's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Sea , and understanding them should be part of your investment process.

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.