Is Seritage Growth Properties (NYSE:SRG) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Seritage Growth Properties (NYSE:SRG) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Seritage Growth Properties

What Is Seritage Growth Properties's Debt?

You can click the graphic below for the historical numbers, but it shows that Seritage Growth Properties had US$330.0m of debt in March 2024, down from US$799.9m, one year before. However, because it has a cash reserve of US$114.9m, its net debt is less, at about US$215.1m.

How Healthy Is Seritage Growth Properties' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seritage Growth Properties had liabilities of US$40.1m due within 12 months and liabilities of US$330.8m due beyond that. On the other hand, it had cash of US$114.9m and US$9.91m worth of receivables due within a year. So its liabilities total US$246.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$275.2m, so it does suggest shareholders should keep an eye on Seritage Growth Properties' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Seritage Growth Properties will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Seritage Growth Properties made a loss at the EBIT level, and saw its revenue drop to US$25m, which is a fall of 67%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Seritage Growth Properties's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$56m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$48m of cash over the last year. So in short it's a really risky stock. 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 Seritage Growth Properties is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com