Is SeaChange International (NASDAQ:SEAC) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 SeaChange International, Inc. (NASDAQ:SEAC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SeaChange International

What Is SeaChange International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 SeaChange International had US$2.41m of debt, an increase on none, over one year. However, it does have US$5.94m in cash offsetting this, leading to net cash of US$3.53m.

How Strong Is SeaChange International's Balance Sheet?

We can see from the most recent balance sheet that SeaChange International had liabilities of US$12.0m falling due within a year, and liabilities of US$6.45m due beyond that. Offsetting these obligations, it had cash of US$5.94m as well as receivables valued at US$16.8m due within 12 months. So it can boast US$4.20m more liquid assets than total liabilities.

This surplus suggests that SeaChange International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SeaChange International 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 SeaChange International 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.

Over 12 months, SeaChange International made a loss at the EBIT level, and saw its revenue drop to US$36m, which is a fall of 44%. To be frank that doesn't bode well.

So How Risky Is SeaChange International?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year SeaChange International had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$11m of cash and made a loss of US$17m. Given it only has net cash of US$3.53m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 example, we've discovered 5 warning signs for SeaChange International (1 shouldn't be ignored!) that you should be aware of before investing here.

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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