Is Take-Two Interactive Software (NASDAQ:TTWO) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Take-Two Interactive Software, Inc. (NASDAQ:TTWO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Take-Two Interactive Software

What Is Take-Two Interactive Software's Debt?

As you can see below, Take-Two Interactive Software had US$3.08b of debt at June 2023, down from US$3.29b a year prior. However, it also had US$885.0m in cash, and so its net debt is US$2.19b.

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

We can see from the most recent balance sheet that Take-Two Interactive Software had liabilities of US$2.74b falling due within a year, and liabilities of US$3.85b due beyond that. Offsetting these obligations, it had cash of US$885.0m as well as receivables valued at US$702.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.00b.

While this might seem like a lot, it is not so bad since Take-Two Interactive Software has a huge market capitalization of US$23.9b, 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. 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 Take-Two Interactive Software 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.

In the last year Take-Two Interactive Software wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to US$5.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Take-Two Interactive Software managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$584m. 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. Another cause for caution is that is bled US$288m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Take-Two Interactive Software I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.