Alphabet (NASDAQ:GOOGL) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Alphabet Inc. (NASDAQ:GOOGL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alphabet

What Is Alphabet's Net Debt?

As you can see below, Alphabet had US$12.9b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$93.2b in cash to offset that, meaning it has US$80.4b net cash.

A Look At Alphabet's Liabilities

We can see from the most recent balance sheet that Alphabet had liabilities of US$80.8b falling due within a year, and liabilities of US$35.3b due beyond that. On the other hand, it had cash of US$93.2b and US$49.1b worth of receivables due within a year. So it can boast US$26.2b more liquid assets than total liabilities.

Having regard to Alphabet's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$2.15t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Alphabet has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Alphabet grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. 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 Alphabet 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 Alphabet 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. During the last three years, Alphabet produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alphabet has US$80.4b in net cash and a decent-looking balance sheet. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think Alphabet's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Alphabet's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.