In This Article:
For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it currently lacks a track record of revenue and profit. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.
If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Cadence Design Systems (NASDAQ:CDNS). Now this is not to say that the company presents the best investment opportunity around, but profitability is a key component to success in business.
See our latest analysis for Cadence Design Systems
How Quickly Is Cadence Design Systems Increasing Earnings Per Share?
The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. Cadence Design Systems managed to grow EPS by 14% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.
One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. Cadence Design Systems maintained stable EBIT margins over the last year, all while growing revenue 11% to US$4.4b. That's a real positive.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
Fortunately, we've got access to analyst forecasts of Cadence Design Systems' future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Cadence Design Systems Insiders Aligned With All Shareholders?
Owing to the size of Cadence Design Systems, we wouldn't expect insiders to hold a significant proportion of the company. But we do take comfort from the fact that they are investors in the company. Notably, they have an enviable stake in the company, worth US$656m. This comes in at 0.8% of shares in the company, which is a fair amount of a business of this size. This should still be a great incentive for management to maximise shareholder value.
Should You Add Cadence Design Systems To Your Watchlist?
One positive for Cadence Design Systems is that it is growing EPS. That's nice to see. To add an extra spark to the fire, significant insider ownership in the company is another highlight. The combination definitely favoured by investors so consider keeping the company on a watchlist. One of Buffett's considerations when discussing businesses is if they are capital light or capital intensive. Generally, a company with a high return on equity is capital light, and can thus fund growth more easily. So you might want to check this graph comparing Cadence Design Systems' ROE with industry peers (and the market at large).