Health Check: How Prudently Does Seritage Growth Properties (NYSE:SRG) Use 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. As with many other companies Seritage Growth Properties (NYSE:SRG) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out 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$1.44b of debt in March 2022, down from US$1.60b, one year before. However, because it has a cash reserve of US$53.8m, its net debt is less, at about US$1.39b.

How Healthy Is Seritage Growth Properties' Balance Sheet?

According to the last reported balance sheet, Seritage Growth Properties had liabilities of US$96.5m due within 12 months, and liabilities of US$1.46b due beyond 12 months. Offsetting this, it had US$53.8m in cash and US$38.2m in receivables that were due within 12 months. So it has liabilities totalling US$1.47b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$388.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Seritage Growth Properties would probably need a major re-capitalization if its creditors were to demand repayment. 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.

In the last year Seritage Growth Properties had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to US$106m. We would much prefer see growth.

Caveat Emptor

Importantly, Seritage Growth Properties had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$63m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$143m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For instance, we've identified 3 warning signs for Seritage Growth Properties (2 are a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.