Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Activision Blizzard, Inc. (NASDAQ:ATVI) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Activision Blizzard's Net Debt?
As you can see below, Activision Blizzard had US$2.67b of debt at June 2019, down from US$4.39b a year prior. But it also has US$4.67b in cash to offset that, meaning it has US$2.00b net cash.
How Healthy Is Activision Blizzard's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Activision Blizzard had liabilities of US$1.64b due within 12 months and liabilities of US$3.88b due beyond that. On the other hand, it had cash of US$4.67b and US$455.0m worth of receivables due within a year. So it has liabilities totalling US$393.0m more than its cash and near-term receivables, combined.
This state of affairs indicates that Activision Blizzard's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$35.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Activision Blizzard boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Activision Blizzard grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Activision Blizzard'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Activision Blizzard may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Activision Blizzard actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
We could understand if investors are concerned about Activision Blizzard's liabilities, but we can be reassured by the fact it has has net cash of US$2.0b. And it impressed us with free cash flow of US$1.7b, being 109% of its EBIT. So is Activision Blizzard's debt a risk? It doesn't seem so to us. We'd be very excited to see if Activision Blizzard insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.