We Think Alphabet (NASDAQ:GOOGL) Can Manage Its Debt With Ease

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, Alphabet Inc. (NASDAQ:GOOGL) does carry debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Alphabet

What Is Alphabet's Debt?

As you can see below, Alphabet had US$11.9b of debt, at March 2024, 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$108.1b in cash, leading to a US$96.2b net cash position.

How Healthy Is Alphabet's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alphabet had liabilities of US$77.0b due within 12 months and liabilities of US$37.5b due beyond that. Offsetting this, it had US$108.1b in cash and US$44.6b in receivables that were due within 12 months. So it can boast US$38.1b 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 it's very unlikely that the US$2.25t company is short on cash, but still worth keeping an eye on the 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 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 Alphabet'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the most recent three years, Alphabet recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alphabet has net cash of US$96.2b, as well as more liquid assets than liabilities. And we liked the look of last year's 34% year-on-year EBIT growth. So we don't think Alphabet's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Alphabet, you may well want to click here to check an interactive graph of its earnings per share history.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com