Does Cisco Systems (NASDAQ:CSCO) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cisco Systems, Inc. (NASDAQ:CSCO) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cisco Systems

How Much Debt Does Cisco Systems Carry?

As you can see below, Cisco Systems had US$8.43b of debt at April 2023, down from US$9.43b a year prior. However, its balance sheet shows it holds US$23.3b in cash, so it actually has US$14.9b net cash.

How Healthy Is Cisco Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cisco Systems had liabilities of US$28.7b due within 12 months and liabilities of US$26.5b due beyond that. Offsetting these obligations, it had cash of US$23.3b as well as receivables valued at US$8.51b due within 12 months. So it has liabilities totalling US$23.4b more than its cash and near-term receivables, combined.

Since publicly traded Cisco Systems shares are worth a very impressive total of US$219.2b, 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. 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.

Fortunately, Cisco Systems grew its EBIT by 2.6% in the last year, making that debt load look even more manageable. 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 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. 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. Happily for any shareholders, Cisco Systems actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Cisco Systems does have more liabilities than liquid assets, it also has net cash of US$14.9b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in US$17b. So we don't think Cisco Systems's use of debt is risky. We'd be very excited to see if Cisco 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.