These 4 Measures Indicate That Ubisoft Entertainment (EPA:UBI) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Ubisoft Entertainment SA (EPA:UBI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Ubisoft Entertainment

What Is Ubisoft Entertainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ubisoft Entertainment had €2.04b of debt in September 2024, down from €2.19b, one year before. However, because it has a cash reserve of €933.1m, its net debt is less, at about €1.10b.

A Look At Ubisoft Entertainment's Liabilities

We can see from the most recent balance sheet that Ubisoft Entertainment had liabilities of €700.1m falling due within a year, and liabilities of €2.23b due beyond that. On the other hand, it had cash of €933.1m and €614.7m worth of receivables due within a year. So it has liabilities totalling €1.38b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €1.74b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Ubisoft Entertainment's debt of just -6.9 times EBITDA is clearly modest. But strangely, EBIT was only 0.93 times interest expenses, suggesting the that may paint an overly pretty picture of the stock. We also note that Ubisoft Entertainment improved its EBIT from a last year's loss to a positive €52m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ubisoft Entertainment 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 to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Ubisoft Entertainment saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Ubisoft Entertainment's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Looking at the bigger picture, it seems clear to us that Ubisoft Entertainment's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Ubisoft Entertainment (of which 2 are significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.