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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 Sea Limited (NYSE:SE) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Sea
How Much Debt Does Sea Carry?
As you can see below, Sea had US$3.19b of debt at September 2024, down from US$3.53b a year prior. But it also has US$7.91b in cash to offset that, meaning it has US$4.72b net cash.
How Strong Is Sea's Balance Sheet?
We can see from the most recent balance sheet that Sea had liabilities of US$9.59b falling due within a year, and liabilities of US$4.07b due beyond that. Offsetting this, it had US$7.91b in cash and US$4.23b in receivables that were due within 12 months. So its liabilities total US$1.52b more than the combination of its cash and short-term receivables.
Since publicly traded Sea shares are worth a very impressive total of US$60.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sea boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Sea's load is not too heavy, because its EBIT was down 67% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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.