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. Importantly, Adobe Inc. (NASDAQ:ADBE) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Adobe Carry?

The image below, which you can click on for greater detail, shows that at February 2025 Adobe had debt of US$6.16b, up from US$3.64b in one year. But on the other hand it also has US$7.44b in cash, leading to a US$1.28b net cash position.NasdaqGS:ADBE Debt to Equity History May 14th 2025

How Healthy Is Adobe's Balance Sheet?

The latest balance sheet data shows that Adobe had liabilities of US$9.16b due within a year, and liabilities of US$7.70b falling due after that. On the other hand, it had cash of US$7.44b and US$1.97b worth of receivables due within a year. So it has liabilities totalling US$7.45b more than its cash and near-term receivables, combined.

Of course, Adobe has a titanic market capitalization of US$168.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

See our latest analysis for Adobe

And we also note warmly that Adobe grew its EBIT by 16% last year, making its debt load easier to handle. 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.

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Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Adobe actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Adobe has US$1.28b in net cash. And it impressed us with free cash flow of US$9.2b, being 109% of its EBIT. So is Adobe's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Adobe would be if insiders have been buying shares: if you're conscious of that signal too,  you can find out instantly by clicking this link.

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.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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