Is Cisco Systems (NASDAQ:CSCO) Using Too Much Debt?

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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cisco Systems

How Much Debt Does Cisco Systems Carry?

As you can see below, Cisco Systems had US$8.93b of debt at October 2022, down from US$9.50b a year prior. However, it does have US$19.8b in cash offsetting this, leading to net cash of US$10.9b.

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$24.9b due within 12 months and liabilities of US$27.9b due beyond that. Offsetting these obligations, it had cash of US$19.8b as well as receivables valued at US$9.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$23.9b.

Of course, Cisco Systems has a titanic market capitalization of US$195.4b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cisco Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Cisco Systems's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cisco Systems's ability to maintain a healthy balance sheet going forward. 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. While Cisco Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Cisco Systems actually produced more free cash flow than EBIT over the last three years. 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$10.9b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$13b. So is Cisco Systems's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Cisco Systems's dividend history, without delay!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.