Yahoo Finance Here's Why Cisco Systems (NASDAQ:CSCO) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Cisco Systems, Inc. (NASDAQ:CSCO) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Cisco Systems
How Much Debt Does Cisco Systems Carry?
As you can see below, Cisco Systems had US$14.6b of debt at January 2021, down from US$16.0b a year prior. But it also has US$30.6b in cash to offset that, meaning it has US$16.0b net cash.
How Strong Is Cisco Systems' Balance Sheet?
The latest balance sheet data shows that Cisco Systems had liabilities of US$27.3b due within a year, and liabilities of US$29.2b falling due after that. Offsetting this, it had US$30.6b in cash and US$9.37b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.5b.
Since publicly traded Cisco Systems shares are worth a very impressive total of US$218.3b, it seems unlikely that this level of liabilities would be a major threat. 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, Cisco Systems boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Cisco Systems saw its EBIT decline by 6.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cisco Systems'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cisco Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Cisco Systems 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
We could understand if investors are concerned about Cisco Systems's liabilities, but we can be reassured by the fact it has has net cash of US$16.0b. And it impressed us with free cash flow of US$14b, being 102% of its EBIT. So we don't think Cisco Systems'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. To that end, you should be aware of the 1 warning sign we've spotted with Cisco Systems .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. 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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