Share Dilution

Does Cadence Design Systems (NASDAQ: CDNS) have a healthy track record?

David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Cadence Design Systems, Inc. (NASDAQ: CDNS) has debt on its balance sheet. But does this debt worry shareholders?

When Is Debt a Problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels together.

Check out our latest review for Cadence Design Systems

What is Cadence Design Systems’ net debt?

You can click on the graph below for the historical numbers, but it shows that Cadence Design Systems was in debt of $ 199.2 million in April 2021, up from $ 696.2 million a year earlier. However, it has US $ 743.0 million in cash offsetting this, leading to a net cash position of US $ 543.8 million.

NasdaqGS: History of CDNS debt to equity June 5, 2021

How strong is Cadence Design Systems’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Cadence Design Systems had a liability of $ 792.3 million due within 12 months and a liability of $ 664.2 million due beyond. In return, he had $ 743.0 million in cash and $ 395.6 million in receivables due within 12 months. Its liabilities therefore total $ 317.9 million more than the combination of its cash and short-term receivables.

Considering the size of Cadence Design Systems, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the US $ 35.3 billion company struggling to find cash, we still think it’s worth watching its balance sheet. Despite its notable liabilities, Cadence Design Systems has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!

On top of that, we are happy to report that Cadence Design Systems has increased its EBIT by 41%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Cadence Design Systems can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the tax authorities love accounting profits, lenders only accept hard cash. While Cadence Design Systems has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it is building. (or erode) that cash balance. Over the past three years, Cadence Design Systems has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.

In summary

While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that Cadence Design Systems has $ 543.8 million in net cash. And he impressed us with free cash flow of US $ 806 million, or 122% of his EBIT. We therefore do not believe that Cadence Design Systems’ use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 1 warning sign for Cadence Design Systems you must be aware.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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