Does Activision Blizzard (NASDAQ:ATVI) Have A Healthy Balance Sheet?

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.' 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 note that Activision Blizzard, Inc. (NASDAQ:ATVI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Activision Blizzard

What Is Activision Blizzard's Debt?

The chart below, which you can click on for greater detail, shows that Activision Blizzard had US$3.61b in debt in March 2023; about the same as the year before. However, it does have US$12.6b in cash offsetting this, leading to net cash of US$8.95b.

How Healthy Is Activision Blizzard's Balance Sheet?

The latest balance sheet data shows that Activision Blizzard had liabilities of US$2.82b due within a year, and liabilities of US$4.46b falling due after that. Offsetting this, it had US$12.6b in cash and US$764.0m in receivables that were due within 12 months. So it actually has US$6.05b more liquid assets than total liabilities.

This short term liquidity is a sign that Activision Blizzard could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Activision Blizzard boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Activision Blizzard's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Activision Blizzard can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Activision Blizzard has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Activision Blizzard generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Activision Blizzard has US$8.95b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.0b, being 88% of its EBIT. So we don't have any problem with Activision Blizzard's use of debt. We'd be motivated to research the stock further if we found out that Activision Blizzard insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.