Does Electronic Arts Inc's (EA) Debt Level Pose A Serious Problem?

With a market capitalization of USD $32.65B, Electronic Arts Inc (NASDAQ:EA) falls in the category of stocks popularly identified as large-caps. These are established companies that attract investors due to diversified revenue streams and ability to enhance total returns through dividends. However, another important aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. View our latest analysis for Electronic Arts

Is EA’s level of debt at an acceptable level?

What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. In the case of EA, the debt-to-equity ratio is 22.58%, which indicates that its debt is at an acceptable level.

How does EA’s operating cash flow stack up against its debt?

A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This also assesses EA's debt repayment capacity, which is not a big concern for a large company. EA’s recent operating cash flow exceeded its debt obligations within the past year,which means EA generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company.This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.

Next Steps:

Are you a shareholder? EA’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Given that EA’s financial situation may differ over time, I suggest researching market expectations for EA’s future growth on our free analysis platform.

Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I suggest you look at EA’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.