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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Alphabet Inc. (NASDAQ:GOOGL) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Alphabet

What Is Alphabet’s Net Debt?

As you can see below, Alphabet had US$12.9b of debt, at December 2022, 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$113.8b in cash, so it actually has US$100.9b net cash.

How Strong Is Alphabet’s Balance Sheet?

The latest balance sheet data shows that Alphabet had liabilities of US$69.3b due within a year, and liabilities of US$39.8b falling due after that. On the other hand, it had cash of US$113.8b and US$40.3b worth of receivables due within a year. So it can boast US$44.9b more liquid assets than total liabilities.

This short term liquidity is a sign that Alphabet could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alphabet boasts net cash, so it’s fair to say it does not have a heavy debt load!

On the other hand, Alphabet saw its EBIT drop by 4.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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. During the last three years, Alphabet generated free cash flow amounting to a very robust 87% of its EBIT, more than we’d expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company’s debt, in this case Alphabet has US$100.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$60b. So is Alphabet’s debt a risk? It doesn’t seem so to us. 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.

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The establishment of a steady passive-income stream is a huge milestone for any investor. There are few things sweeter than unearned income. This is especially true when you can generate that income in a Tax-Free Savings Account (TFSA). That is exactly what we are going to set out to do today. In this hypothetical, we are going to snatch up True North Commercial REIT (TSX:TNT.UN) in our TFSA. With it, we will look to make $600 in tax-free, monthly passive income. Let’s jump in!

Why you should look to make passive income in this market

Growth-oriented investors have had their work cut out for them since the spring of 2022. The Bank of Canada (BoC) and many of its central bank peers in the developed world have responded to soaring inflation rates with an aggressive interest rate tightening policy. This has succeeded in cooling inflation from the red-hot rates we saw in the summer of 2022. However, it has also sparked a broader market correction and triggered a developing crisis for the global banking sector.

In this environment, it is nice to be able to rely on passive income. Indeed, the S&P/TSX Composite Index has failed to recover all its spring 2022 losses.

Here’s why True North REIT is a perfect target for us today

True North Commercial REIT is a Toronto-based real estate investment trust (REIT) that is focused on creating value for its unitholders through investment in high-quality commercial properties. Shares of this REIT have plunged 42% in 2023 as of close on March 28. It was hit hard after the release of its final batch of fiscal 2022 earnings. The stock has plunged 52% year over year.

The REIT announced a 50% distribution reduction in its fourth-quarter (Q4) and full-year 2022 earnings report. Predictably, this sparked a sharp sell off. The reduction, combined with the strategic sale of two recently vacated Ontario properties, aims to bolster True North’s financial strength going forward. This REIT still boasts a strong yield and is a worthy target for passive-income investors. Its shares last had a price-to-earnings ratio of 19, putting it in solid value territory compared to its industry peers.

How to generate $600/month in tax-free passive income

This REIT closed at $3.46 on March 27. For our hypothetical, we are going to be utilizing almost all of the cumulative room available for a TFSA in 2023. That cumulative room rose to $88,000 this year.

We can snatch up 24,000 shares of True North REIT for a purchase price of $83,040. As an aside, it is worth noting that investors should not look to pour their entire TFSA room into a single security. Instead, this hypothetical works to illustrate how you can generate passive income in a TFSA. Ideally, your portfolio would be much more diversified to provide long-term protection.

The REIT now offers a monthly distribution of $0.025 per share. That represents a very strong 8.5% yield. The purchase will enable us to generate tax-free passive income of $600 per month going forward.

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Apart from the US Chips and Science Act, the US Inflation Reduction Act is another incentive programme “that will compete for the same sorts of investments that Singapore would be interested in”, EDB chairman Beh Swan Gin told reporters at a press conference in February.

The US Inflation Reduction Act comprises billions of dollars of subsidies for the purchase of electric cars and other eco-friendly products that are made in America. This has rattled many European nations who fear that companies may choose to relocate or at least prioritise investment in the US.

In response, the European Commission has presented a Green Deal Industrial Plan with higher levels of state aid to help Europe compete as a manufacturing hub for clean tech products.

Then, there is BEPS 2.0 which is advocating a minimum effective tax rate of 15 per cent for multinational groups with annual group revenues of at least 750 million euros (US$818 million).

Currently, Singapore’s headline corporate tax rate is at 17 per cent but the effective tax rate of many businesses may be lower than that, or even the proposed global minimum, due to tax incentives given to those seen as beneficial to the country’s economic development.

Singapore has said it will implement a domestic top-up tax for these large multinational enterprises – about 1,800 of them currently meet the revenue threshold – from 2025.

Already, these firms are having concerns about how the new global tax rules will erode their tax savings in Singapore and mulling whether they should be looking at relocating or making new investments in other countries, said Mr Baik.

“Certainly, tax is just one of the factors in this evaluation process but recent global tax developments have undoubtedly elevated the tax benefits consideration among the factors.”

Meanwhile, the cost of doing business in Singapore has crept up the list of concerns for businesses.

Beyond the inflationary push in operating expenses such as electricity, firms are increasingly mindful of the cost of living here, said Dr Lei Hsien-Hsien, chief executive officer of The American Chamber of Commerce (AmCham) in Singapore.

The Singapore International Chamber of Commerce (SICC) said global companies are most concerned about the elevated rental costs for residential and commercial premises.

The former, in particular, is “making living here much less viable for many expat executives and prohibitive for others”, and this impacts a company’s ability to relocate talent to Singapore.

While Singapore continues to stand out for having low risks of doing business, SICC said “there is no room for complacency” as its regional peers can now better manage risks than before.

“When combined with lower business costs, regional markets will remain attractive to investors based on their risk appetite and their specific business requirements,” the chamber said.

A separate survey, released this week by the European Chamber of Commerce Singapore, also showed that 69 per cent of companies are ready to relocate their staff out of Singapore if there is no relief from rising rental costs of residential and office spaces.

Mr Wong, who is also Finance Minister, has warned that multinational firms are “mobile and … have options” for their next investment projects. Already, firms are “making this clear” in consultation sessions with policymakers.

“Because of BEPS, they will no longer enjoy the same tax advantages in Singapore. Meanwhile, other countries in the region are cheaper, while their home countries are offering very generous incentive packages,” Mr Wong said in his Budget round-up speech on Feb 24.

“So they ask us: what else can Singapore offer to stay competitive?”

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