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

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 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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sea

How Much Debt Does Sea Carry?

As you can see below, Sea had US$3.53b of debt at September 2023, down from US$4.23b a year prior. However, it does have US$5.98b in cash offsetting this, leading to net cash of US$2.45b.

How Strong Is Sea's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sea had liabilities of US$7.03b due within 12 months and liabilities of US$4.42b due beyond that. On the other hand, it had cash of US$5.98b and US$2.31b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.15b.

Given Sea has a humongous market capitalization of US$25.3b, it's hard to believe these liabilities pose much 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.

It was also good to see that despite losing money on the EBIT line last year, Sea turned things around in the last 12 months, delivering and EBIT of US$920m. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sea has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Sea actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Sea's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$2.45b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in US$967m. So is Sea's debt a risk? It doesn't seem so to us. 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. Be aware that Sea is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.