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.
Over twelve months, Take-Two Interactive Software saw its revenues remain fairly stable, reporting no positive earnings before interest and taxes. Although that’s not a bad thing, we would rather see growth.
Importantly, Take-Two Interactive Software posted a loss before interest and taxes (EBIT) last year. To be specific, the EBIT loss amounted to $515 million. Considering that in addition to the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think the balance is somewhat tense, but not irreparable. It doesn’t help, however, that $559 million in cash has been burned over the past year. So suffice it to say, we consider the stock risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, every company can manage risks that exist off the balance sheet. We’ve identified two warning signs with Take-Two Interactive Software, and understanding it should be part of your investment process.
Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freenow.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.
