Is Activision Blizzard (NASDAQ:ATVI) Using Too Much Debt?

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. Importantly, Activision Blizzard, Inc. (NASDAQ:ATVI) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Activision Blizzard

What Is Activision Blizzard's Debt?

As you can see below, Activision Blizzard had US$3.61b of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$10.0b in cash to offset that, meaning it has US$6.39b net cash.

A Look At Activision Blizzard's Liabilities

The latest balance sheet data shows that Activision Blizzard had liabilities of US$2.02b due within a year, and liabilities of US$5.01b falling due after that. On the other hand, it had cash of US$10.0b and US$585.0m worth of receivables due within a year. So it actually has US$3.56b 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!

Another good sign is that Activision Blizzard has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Activision Blizzard recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually 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$6.39b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.8b, being 83% of its EBIT. So is Activision Blizzard's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Activision Blizzard has 1 warning sign we think you should be aware of.

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.

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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.