Cadence Design Systems (NASDAQ:CDNS) Could Easily Take On More Debt
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Cadence Design Systems, Inc. (NASDAQ:CDNS) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Cadence Design Systems
How Much Debt Does Cadence Design Systems Carry?
The image below, which you can click on for greater detail, shows that Cadence Design Systems had debt of US$649.1m at the end of December 2023, a reduction from US$748.1m over a year. However, it does have US$1.14b in cash offsetting this, leading to net cash of US$489.5m.
How Healthy Is Cadence Design Systems' Balance Sheet?
The latest balance sheet data shows that Cadence Design Systems had liabilities of US$1.59b due within a year, and liabilities of US$674.4m falling due after that. Offsetting these obligations, it had cash of US$1.14b as well as receivables valued at US$506.8m due within 12 months. So its liabilities total US$619.9m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Cadence Design Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$85.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Cadence Design Systems also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Cadence Design Systems grew its EBIT by 18% last year, making its debt load easier 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 Cadence Design 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Cadence Design Systems 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, Cadence Design 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
While it is always sensible to look at a company's total liabilities, it is very reassuring that Cadence Design Systems has US$489.5m in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in US$1.2b. So is Cadence Design Systems's debt a risk? It doesn't seem so to us. We'd be very excited to see if Cadence Design Systems insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
