Is SeaWorld Entertainment Inc (SEAS) Worth a Look?

Debt: As you can see in the table below, at the end of 2012, SeaWorld’s long term debt to equity ratio stands at a whopping 401% — far exceeding my personal threshold of 50%. Its times interest earned — defined as operating income divided by interest expense — equates to just two, similar to theme park competitor Cedar Fair, L.P. (NYSE:FUN). In other words, its operating profit only exceeds interest expense by two times. The general rule of thumb for most companies requires five times interest earned. This should be a deal breaker for prospective shareholders. SeaWorld sits on debt with variable interest rates attached to it which means interest payments will raise if the Fed decides to increase rates from historical lows.

In contrast, Disney’s operating income exceeds its interest expenses by 24 times, giving it a great margin of safety when it comes to meeting its interest obligations. Six Flags Entertainment Corp (NYSE:SIX) and Universal stand in the middle with 4 and 6 times interest earned, respectively.

In addition, you should also worry about how SeaWorld will make its promised $0.20 per share per quarter dividend payment.

SeaWorld also sports the lowest free cash flow margin. Cedar Fair’s free cash flow margin tells you it possesses a greater ability to convert revenue into cash giving a slightly greater ability to make its interest payments.

Compiled from SEC filings and Yahoo! Finance. *Full year 2012 figures. **As of this writing.

Conclusion

What does the future hold for SeaWorld and its shareholders? The future could be a dismal one if interest rates rise or if SeaWorld experiences a sudden unexpected drop in cash flow. Your money will be better served visiting SeaWorld rather than investing in it.

The article Is this Theme Park Worth a Look? originally appeared on Fool.com.

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