Advertisement
UK markets closed
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • FTSE 250

    19,884.73
    +74.07 (+0.37%)
     
  • AIM

    743.26
    +1.15 (+0.15%)
     
  • GBP/EUR

    1.1696
    +0.0003 (+0.02%)
     
  • GBP/USD

    1.2617
    -0.0005 (-0.04%)
     
  • Bitcoin GBP

    55,415.36
    -421.38 (-0.75%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • DOW

    39,807.37
    +47.29 (+0.12%)
     
  • CRUDE OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD FUTURES

    2,254.80
    +16.40 (+0.73%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • CAC 40

    8,205.81
    +1.00 (+0.01%)
     

Does Activision Blizzard (NASDAQ:ATVI) Have A Healthy Balance Sheet?

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. 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, Activision Blizzard, Inc. (NASDAQ:ATVI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

ADVERTISEMENT

Check out our latest analysis for Activision Blizzard

What Is Activision Blizzard's Net Debt?

As you can see below, Activision Blizzard had US$2.40b of debt at December 2019, down from US$2.67b a year prior. However, its balance sheet shows it holds US$5.79b in cash, so it actually has US$3.40b net cash.

NasdaqGS:ATVI Historical Debt, February 28th 2020
NasdaqGS:ATVI Historical Debt, February 28th 2020

A Look At Activision Blizzard's Liabilities

Zooming in on the latest balance sheet data, we can see that Activision Blizzard had liabilities of US$2.92b due within 12 months and liabilities of US$4.13b due beyond that. Offsetting these obligations, it had cash of US$5.79b as well as receivables valued at US$848.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$398.0m.

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 it's very unlikely that the US$44.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Activision Blizzard also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Activision Blizzard has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Activision Blizzard actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Activision Blizzard has US$3.40b in net cash. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in US$1.7b. So is Activision Blizzard's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Activision Blizzard insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.