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. We notice that Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has debt on its balance sheet. But should shareholders be concerned about the use of debt?
Debt and other liabilities become risky for a company when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An essential part of capitalism is the process of ‘creative destruction’, whereby bankrupt companies are mercilessly liquidated by their bankers. While not too common, we often see indebted companies permanently diluting shareholders because lenders force them to raise capital at a difficult price. Of course, debt can be an important tool in companies, especially in wealthy companies. The first step in assessing a company’s debt levels is to look at its cash and debt together.
Check out our latest analysis for Take-Two Interactive Software
The image below, which you can click on for more detail, shows that Take-Two Interactive Software had debt of $3.66 billion as of September 2024, up from $3.08 billion in one year. On the other hand, the country has $879.6 million in cash, leading to a net debt of about $2.78 billion.
Zooming in on the latest balance sheet data, we can see that Take-Two Interactive Software had liabilities of US$3.20b due within 12 months, and liabilities of US$4.08b due beyond that. On the other hand, the company had US$879.6 million in cash and US$938.3 million in receivables due within a year. So it has liabilities totaling US$5.46b more than its cash and near-term receivables, combined.
Of course, Take-Two Interactive Software has a massive market cap of $32.6 billion, so these liabilities are probably manageable. That said, it is clear that we must continue to monitor the country’s balance sheet to prevent it from changing for the worse. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Take-Two Interactive Software can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts interesting.
