Would Take-Two Interactive Software (NASDAQ:TTWO) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. 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

What Is Take-Two Interactive Software's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Take-Two Interactive Software had US$3.08b of debt, an increase on none, over one year. However, because it has a cash reserve of US$1.01b, its net debt is less, at about US$2.07b.

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$3.85b falling due within a year, and liabilities of US$2.97b due beyond that. Offsetting this, it had US$1.01b in cash and US$843.1m in receivables that were due within 12 months. So it has liabilities totalling US$4.96b more than its cash and near-term receivables, combined.

Given Take-Two Interactive Software has a humongous market capitalization of US$25.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 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 53%, to US$5.3b. 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$430m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$203m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. We've identified 1 warning sign with Take-Two Interactive Software , and understanding them should be part of your investment process.

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.