Yahoo Finance Alphabet (NASDAQ:GOOG.L) Has A Rock Solid Balance Sheet
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.' 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. We note that Alphabet Inc. (NASDAQ:GOOG.L) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Alphabet
How Much Debt Does Alphabet Carry?
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. However, its balance sheet shows it holds US$108.1b in cash, so it actually has US$96.2b net cash.
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 these obligations, it had cash of US$108.1b as well as receivables valued at US$44.6b due within 12 months. So it actually has 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$2.14t 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Alphabet may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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 free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case Alphabet has US$96.2b in net cash and a decent-looking balance sheet. 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. 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.
