Adobe Inc.

249.0954 386.7450
52 weeks
52 weeks

Mkt Cap 167.54B

Shares Out 485.44M

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Does Adobe (NASDAQ:ADBE) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Adobe Inc. (NASDAQ:ADBE) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

You can click the graphic below for the historical numbers, but it shows that as of November 2019 Adobe had US$4.14b of debt, an increase on US$4.1k, over one year. But it also has US$4.18b in cash to offset that, meaning it has US$38.7m net cash.

NasdaqGS:ADBE Historical Debt, January 17th 2020

Zooming in on the latest balance sheet data, we can see that Adobe had liabilities of US$8.19b due within 12 months and liabilities of US$2.04b due beyond that. Offsetting these obligations, it had cash of US$4.18b as well as receivables valued at US$1.53b due within 12 months. So it has liabilities totalling US$4.52b more than its cash and near-term receivables, combined.

Of course, Adobe has a titanic market capitalization of US$166.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Adobe boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Adobe grew its EBIT at 15% over the last year, further increasing its ability to manage 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 Adobe'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, a company can only pay off debt with cold hard cash, not accounting profits. Adobe 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 last three years, Adobe actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

We could understand if investors are concerned about Adobe's liabilities, but we can be reassured by the fact it has has net cash of US$38.7m. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in US$3.8b. So we don't think Adobe's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Adobe you should know about.

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.

If you spot an error that warrants correction, please contact the editor at This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.


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