The news of Adobe Systems (ADBE) yesterday would have not surprised the serious student of cash flow and cost of capital.

In its June 10-Q, for which the firm consolidates 6 months of activity, despite showing rising net (GAAP) income, when backing out ADBE’s first quarter, it is apparent both cash flow from operations and free cash flow weakened considerably.

In addition, according to CT Capital’s research, ADBE displayed, prior to the most recent announcement:

• Debt that has continued to build
• Financial flexibility has been compromised
• Operating leases continue to grow at a rapid rate
• Low and volatile tax rate, both effective and  actual
• Deterioration in working capital to total debt
• Significant acquisitions
• Decrease in order backlog
• Poor reinvestment rate
• Weakening productivity

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Disclosure: No positions

Kenneth S. Hackel, CFA
President
CT Capital LLC

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If you are interested in learning more about cash flow, financial structure and valuation, order “Security Valuation and Risk Analysis” out this fall from McGraw-Hill.

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