Yahoo Finance What You Must Know About Cadence Design Systems Inc’s (NASDAQ:CDNS) Financial Strength
Cadence Design Systems Inc (NASDAQ:CDNS), a large-cap worth US$12.71b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Cadence Design Systems’s financial liquidity and leverage to give you an idea of Cadence Design Systems’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CDNS here.
View our latest analysis for Cadence Design Systems
How does CDNS’s operating cash flow stack up against its debt?
CDNS’s debt level has been constant at around US$644.8m over the previous year made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$825.4m , ready to deploy into the business. Moreover, CDNS has generated US$579.1m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 89.8%, indicating that CDNS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CDNS’s case, it is able to generate 0.9x cash from its debt capital.
Can CDNS meet its short-term obligations with the cash in hand?
At the current liabilities level of US$870.1m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.13b, leading to a 1.3x current account ratio. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CDNS’s debt level acceptable?
With debt reaching 54.3% of equity, CDNS may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can assess the sustainability of CDNS’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CDNS’s case, the ratio of 15.43x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as CDNS is a safe investment.
Next Steps:
Although CDNS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around CDNS’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CDNS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cadence Design Systems to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CDNS’s future growth? Take a look at our free research report of analyst consensus for CDNS’s outlook.
Valuation: What is CDNS 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 CDNS is currently mispriced by the market.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
