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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Take-Two Interactive Software

How Much Debt Does Take-Two Interactive Software Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Take-Two Interactive Software had debt of US$3.66b, up from US$3.08b in one year. On the flip side, it has US$879.6m in cash leading to net debt of about US$2.78b.

How Strong 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$3.20b falling due within a year, and liabilities of US$4.08b due beyond that. Offsetting these obligations, it had cash of US$879.6m as well as receivables valued at US$938.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.46b.

Given Take-Two Interactive Software has a humongous market capitalization of US$32.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Take-Two Interactive Software's ability to maintain a healthy balance sheet going forward. 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's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Take-Two Interactive Software had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$515m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$559m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Take-Two Interactive Software .

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.