Is Take-Two Interactive Software (NASDAQ:TTWO) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Take-Two Interactive Software, Inc. (NASDAQ:TTWO) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Take-Two Interactive Software

What Is Take-Two Interactive Software's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Take-Two Interactive Software had debt of US$3.09b, up from none in one year. However, it does have US$1.13b in cash offsetting this, leading to net debt of about US$1.96b.

How Strong Is Take-Two Interactive Software's Balance Sheet?

According to the last reported balance sheet, Take-Two Interactive Software had liabilities of US$3.01b due within 12 months, and liabilities of US$4.32b due beyond 12 months. Offsetting these obligations, it had cash of US$1.13b as well as receivables valued at US$795.5m due within 12 months. So it has liabilities totalling US$5.41b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Take-Two Interactive Software has a huge market capitalization of US$20.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Take-Two Interactive Software 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.

In the last year Take-Two Interactive Software wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to US$4.8b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Take-Two Interactive Software still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$78m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$403m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Take-Two Interactive Software that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.