Want to help shape the future of investing tools? Participate in a short research study and receive a 6-month subscription to the award winning Simply Wall St research tool (valued at $60)!
Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Activision Blizzard, Inc. (NASDAQ:ATVI). With a market valuation of US$36b, ATVI is a safe haven in times of market uncertainty due to its strong balance sheet. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for ATVI, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
How does ATVI’s operating cash flow stack up against its debt?
Over the past year, ATVI has reduced its debt from US$4.4b to US$2.7b , which also accounts for long term debt. With this reduction in debt, ATVI’s cash and short-term investments stands at US$3.4b for investing into the business. Moreover, ATVI has produced US$1.9b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 73%, meaning that ATVI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ATVI’s case, it is able to generate 0.73x cash from its debt capital.
Can ATVI meet its short-term obligations with the cash in hand?
With current liabilities at US$2.4b, it appears that the company has been able to meet these obligations given the level of current assets of US$5.0b, with a current ratio of 2.09x. Generally, for Entertainment companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ATVI face the risk of succumbing to its debt-load?
ATVI’s level of debt is appropriate relative to its total equity, at 25%. ATVI is not taking on too much debt commitment, which may be constraining for future growth. We can test if ATVI’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In ATVI’s case, the ratio of 14.86x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ATVI and other large-cap investments thought to be safe.
ATVI’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for ATVI’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Activision Blizzard to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ATVI’s future growth? Take a look at our free research report of analyst consensus for ATVI’s outlook.
- Valuation: What is ATVI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ATVI is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.