We Think Electronic Arts (NASDAQ:EA) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Electronic Arts Inc. (NASDAQ:EA) makes use of debt. But should shareholders be worried about its use of debt?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Electronic Arts Carry?

As you can see below, Electronic Arts had US$1.88b of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$2.25b in cash, leading to a US$364.0m net cash position.

How Strong Is Electronic Arts' Balance Sheet?

We can see from the most recent balance sheet that Electronic Arts had liabilities of US$3.46b falling due within a year, and liabilities of US$2.52b due beyond that. Offsetting these obligations, it had cash of US$2.25b as well as receivables valued at US$679.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.06b.

Given Electronic Arts has a humongous market capitalization of US$40.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Check out our latest analysis for Electronic Arts

On the other hand, Electronic Arts saw its EBIT drop by 4.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Electronic Arts has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Electronic Arts actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Electronic Arts has US$364.0m in net cash. And it impressed us with free cash flow of US$1.9b, being 113% of its EBIT. So we don't think Electronic Arts's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Electronic Arts, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.