Is Activision Blizzard (NASDAQ:ATVI) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Activision Blizzard, Inc. (NASDAQ:ATVI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Activision Blizzard

How Much Debt Does Activision Blizzard Carry?

The chart below, which you can click on for greater detail, shows that Activision Blizzard had US$3.61b in debt in June 2023; about the same as the year before. But on the other hand it also has US$13.1b in cash, leading to a US$9.53b net cash position.

How Healthy Is Activision Blizzard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Activision Blizzard had liabilities of US$3.32b due within 12 months and liabilities of US$4.40b due beyond that. Offsetting these obligations, it had cash of US$13.1b as well as receivables valued at US$1.04b due within 12 months. So it can boast US$6.46b more liquid assets than total liabilities.

This surplus suggests that Activision Blizzard has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Activision Blizzard has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Activision Blizzard saw its EBIT drop by 7.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Activision Blizzard 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Activision Blizzard may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Activision Blizzard generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Activision Blizzard has net cash of US$9.53b, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$2.4b. So we don't think Activision Blizzard's use of debt is risky. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.