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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Sea Limited (NYSE:SE) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is Sea's Net Debt?
The image below, which you can click on for greater detail, shows that Sea had debt of US$3.01b at the end of December 2024, a reduction from US$3.37b over a year. But it also has US$8.62b in cash to offset that, meaning it has US$5.61b net cash.
How Strong Is Sea's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sea had liabilities of US$11.3b due within 12 months and liabilities of US$2.85b due beyond that. Offsetting these obligations, it had cash of US$8.62b as well as receivables valued at US$4.78b due within 12 months. So it has liabilities totalling US$750.0m more than its cash and near-term receivables, combined.
This state of affairs indicates that Sea's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$61.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Sea boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for Sea
In addition to that, we're happy to report that Sea has boosted its EBIT by 93%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sea's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.