How Financially Strong Is Cisco Systems, Inc. (NASDAQ:CSCO)?

There are a number of reasons that attract investors towards large-cap companies such as Cisco Systems, Inc. (NASDAQ:CSCO), with a market cap of US$206b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. This article will examine Cisco Systems’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CSCO here.

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Does CSCO produce enough cash relative to debt?

Over the past year, CSCO has reduced its debt from US$36b to US$26b , which also accounts for long term debt. With this reduction in debt, CSCO currently has US$43b remaining in cash and short-term investments for investing into the business. Moreover, CSCO has generated US$14b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 56%, signalling that CSCO’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 CSCO’s case, it is able to generate 0.56x cash from its debt capital.

Can CSCO pay its short-term liabilities?

Looking at CSCO’s US$26b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. Generally, for Communications companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does CSCO face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 58%, CSCO can be considered as an above-average leveraged company. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies.

Next Steps:

CSCO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CSCO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CSCO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cisco Systems to get a more holistic view of the large-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CSCO’s future growth? Take a look at our free research report of analyst consensus for CSCO’s outlook.
2. Valuation: What is CSCO 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 CSCO is currently mispriced by the market.
3. 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.