Cisco Systems (NASDAQ:CSCO) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Cisco Systems, Inc. (NASDAQ:CSCO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cisco Systems

How Much Debt Does Cisco Systems Carry?

As you can see below, Cisco Systems had US$7.68b of debt at October 2023, down from US$8.93b a year prior. However, its balance sheet shows it holds US$23.9b in cash, so it actually has US$16.2b net cash.

How Strong Is Cisco Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cisco Systems had liabilities of US$27.0b due within 12 months and liabilities of US$26.5b due beyond that. On the other hand, it had cash of US$23.9b and US$8.25b worth of receivables due within a year. So it has liabilities totalling US$21.4b more than its cash and near-term receivables, combined.

Since publicly traded Cisco Systems shares are worth a very impressive total of US$197.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Cisco Systems also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Cisco Systems grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cisco Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Cisco 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. Over the last three years, Cisco Systems actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Cisco Systems does have more liabilities than liquid assets, it also has net cash of US$16.2b. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in US$17b. So we don't think Cisco Systems's use of debt is risky. Another factor that would give us confidence in Cisco Systems would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.