Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sea Limited (NYSE:SE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sea

What Is Sea's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Sea had debt of US$4.18b, up from US$1.28b in one year. But it also has US$7.78b in cash to offset that, meaning it has US$3.60b net cash.

How Healthy Is Sea's Balance Sheet?

We can see from the most recent balance sheet that Sea had liabilities of US$6.74b falling due within a year, and liabilities of US$5.29b due beyond that. Offsetting these obligations, it had cash of US$7.78b as well as receivables valued at US$2.30b due within 12 months. So it has liabilities totalling US$1.96b more than its cash and near-term receivables, combined.

Since publicly traded Sea shares are worth a very impressive total of US$30.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sea also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Sea reported revenue of US$12b, which is a gain of 72%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sea?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sea lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.3b and booked a US$2.7b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$3.60b. That means it could keep spending at its current rate for more than two years. Sea's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 - Sea has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.