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.' 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. We can see that Cadence Design Systems, Inc. (NASDAQ:CDNS) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Cadence Design Systems's Debt?
The image below, which you can click on for greater detail, shows that at December 2024 Cadence Design Systems had debt of US$2.48b, up from US$649.1m in one year. But it also has US$2.78b in cash to offset that, meaning it has US$308.5m net cash.
NasdaqGS:CDNS Debt to Equity History April 14th 2025
How Healthy Is Cadence Design Systems' Balance Sheet?
According to the last reported balance sheet, Cadence Design Systems had liabilities of US$1.37b due within 12 months, and liabilities of US$2.93b due beyond 12 months. Offsetting this, it had US$2.78b in cash and US$680.5m in receivables that were due within 12 months. So its liabilities total US$835.8m more than the combination of its cash and short-term receivables.
This state of affairs indicates that Cadence Design Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$71.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Cadence Design Systems boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Cadence Design Systems has increased its EBIT by 9.0% over twelve months, which should ease any concerns about debt repayment. 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 freereport showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cadence Design 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. During the last three years, Cadence Design Systems generated free cash flow amounting to a very robust 93% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Cadence Design Systems has US$308.5m in net cash. And it impressed us with free cash flow of US$1.1b, being 93% of its EBIT. So we don't think Cadence Design Systems's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Cadence Design Systems, you may well want to click here to check an interactive graph of its earnings per share history.
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.
