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.' 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. Importantly, Take-Two Interactive Software, Inc. (NASDAQ:TTWO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Take-Two Interactive Software Carry?

As you can see below, at the end of June 2024, Take-Two Interactive Software had US$3.65b of debt, up from US$3.08b a year ago. Click the image for more detail. However, it does have US$1.10b in cash offsetting this, leading to net debt of about US$2.56b.

How Strong Is Take-Two Interactive Software's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Take-Two Interactive Software had liabilities of US$2.85b due within 12 months and liabilities of US$4.11b due beyond that. On the other hand, it had cash of US$1.10b and US$674.9m worth of receivables due within a year. So its liabilities total US$5.18b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Take-Two Interactive Software has a huge market capitalization of US$24.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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.

Over 12 months, Take-Two Interactive Software made a loss at the EBIT level, and saw its revenue drop to US$5.4b, which is a fall of 2.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Take-Two Interactive Software produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$408m. 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$357m 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. We've identified 1 warning sign with Take-Two Interactive Software , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.