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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cadence Design Systems, Inc. (NASDAQ:CDNS) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Cadence Design Systems
How Much Debt Does Cadence Design Systems Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Cadence Design Systems had US$2.83b of debt, an increase on US$648.8m, over one year. But on the other hand it also has US$2.94b in cash, leading to a US$116.1m net cash position.
How Healthy Is Cadence Design Systems' Balance Sheet?
According to the last reported balance sheet, Cadence Design Systems had liabilities of US$1.67b due within 12 months, and liabilities of US$2.93b due beyond 12 months. Offsetting this, it had US$2.94b in cash and US$612.3m in receivables that were due within 12 months. So its liabilities total US$1.05b more than the combination of its cash and short-term receivables.
Having regard to Cadence Design Systems' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$82.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cadence Design Systems also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that Cadence Design Systems grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Cadence Design 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.