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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. As with many other companies Electronic Arts Inc. (NASDAQ:EA) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.
View our latest analysis for Electronic Arts
What Is Electronic Arts's Net Debt?
The chart below, which you can click on for greater detail, shows that Electronic Arts had US$1.88b in debt in June 2022; about the same as the year before. However, it does have US$2.42b in cash offsetting this, leading to net cash of US$538.0m.
How Strong Is Electronic Arts' Balance Sheet?
We can see from the most recent balance sheet that Electronic Arts had liabilities of US$2.83b falling due within a year, and liabilities of US$2.72b due beyond that. Offsetting these obligations, it had cash of US$2.42b as well as receivables valued at US$579.0m due within 12 months. So its liabilities total US$2.56b more than the combination of its cash and short-term receivables.
Of course, Electronic Arts has a titanic market capitalization of US$36.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Electronic Arts also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Electronic Arts has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Electronic Arts can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.