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?

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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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sea may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Sea actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Sea's liabilities, but we can be reassured by the fact it has has net cash of US$5.61b. The cherry on top was that in converted 476% of that EBIT to free cash flow, bringing in US$3.0b. So we don't think Sea's use of debt is risky. 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. Be aware that Sea is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.