In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Adobe Inc. (NASDAQ:ADBE) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Adobe
What Is Adobe's Net Debt?
The chart below, which you can click on for greater detail, shows that Adobe had US$4.12b in debt in June 2021; about the same as the year before. However, its balance sheet shows it holds US$5.77b in cash, so it actually has US$1.65b net cash.
A Look At Adobe's Liabilities
The latest balance sheet data shows that Adobe had liabilities of US$6.15b due within a year, and liabilities of US$5.59b falling due after that. Offsetting this, it had US$5.77b in cash and US$1.48b in receivables that were due within 12 months. So it has liabilities totalling US$4.49b more than its cash and near-term receivables, combined.
Having regard to Adobe's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$282.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Adobe also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Adobe has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 Adobe can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.