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Is Adobe Inc.'s (NASDAQ:ADBE) Balance Sheet A Threat To Its Future?

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Adobe Inc. (NASDAQ:ADBE), a large-cap worth US$134b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Adobe’s financial liquidity and leverage to give you an idea of Adobe’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ADBE here.

View our latest analysis for Adobe

Does ADBE Produce Much Cash Relative To Its Debt?

ADBE has built up its total debt levels in the last twelve months, from US$1.9b to US$4.1b – this includes long-term debt. With this growth in debt, ADBE's cash and short-term investments stands at US$3.2b , ready to be used for running the business. On top of this, ADBE has produced US$4.1b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 98%, meaning that ADBE’s current level of operating cash is high enough to cover debt.

Can ADBE meet its short-term obligations with the cash in hand?

At the current liabilities level of US$5.3b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$5.1b, with a current ratio of 0.97x. The current ratio is the number you get when you divide current assets by current liabilities.

NasdaqGS:ADBE Historical Debt, May 31st 2019
NasdaqGS:ADBE Historical Debt, May 31st 2019

Is ADBE’s debt level acceptable?

ADBE is a relatively highly levered company with a debt-to-equity of 42%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of ADBE’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For ADBE, the ratio of 118x suggests that interest is amply covered. Large-cap investments like ADBE are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although ADBE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven't considered other factors such as how ADBE has been performing in the past. I suggest you continue to research Adobe to get a better picture of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for ADBE’s future growth? Take a look at our free research report of analyst consensus for ADBE’s outlook.

  2. Valuation: What is ADBE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ADBE is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.