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Edited by Adam Isaac

Cisco Systems (CSCO) designs, produces and sells Internet Protocol-based networking and other products associated with the communications and information technology industry. It also offers services related to these products. The company offers a wide range of products for transporting, voice, data and video inside buildings, across campuses, and around the world.

Cisco carries out its business globally and is run in four segments: United States and Canada, Europe, Emerging Markets, and Asia Pacific. The Emerging Markets section is made up of Latin America, Eastern Europe, Africa and the Middle East, and Russia and the Commonwealth of Independent States. Cisco Systems, Inc was incorporated in California in December 1984, and its headquarters are in San Jose, California.

In May 2011, Cisco announced its plan to realign its services, sales and engineering organizations to simplify its operating model and focus on five priorities, which include collaboration, video, data center visualization and cloud, leadership in its core business and architectures for business transformation. The firm expects to complete the transformation by the end of year 2012. These changes will streamline the operations of the company and give it a clear focus. In my previous article about the company, I predicted a rise in the stock price and since then, the stock has gained about 16% in value. In this article, I look at the financial strength of the company and analyze in detail the debt and cash flows.

Free Cash Flows:

Free Cash Flows

2011

2010

2009

Net Income

$6,490

$7,767

$6,134

Depreciation and Amortization

$2,486

$2,030

$1,768

Funds from Operations (FFO)

$8,976

$9,797

$7,902

change in noncash current assets

$2,884

$2,965

$1,985

change in noncash current liabilities

$1,820

$2,136

$1,786

Operating Cash flows

$7,912

$8,968

$7,703

Capital Expenditures

$1,440

$6,287

$1,431

Free Operating Cash Flow

$6,472

$2,681

$6,272

Long Term Debt

$16,234

$12,188

$10,295

Figures taken from SEC filings

As it is evident from the table above, Cisco has strong free operating cash flows. According to the most recent earnings report, the firm has more than $10 billion in cash. Moreover, total cash and cash equivalents including investments stood at $48.4 billion; this represents an increase of almost $2 billion from the same quarter last year. Cisco has incredibly strong funds from operations, and the situation looks even more stable in the future. Meanwhile, Cisco has been increasing its noncash current assets and decreasing its noncash current liabilities. Cisco owes its improving cash flow position to a better inventory and credit policy management. The firm has been able to decrease DSO to 31 days form 37 days, as a result, the firm has been able to decrease its accounts receivable and increase the cash collections.

During the last year, the firm has been able to improve the accounts receivable position by more than $300 million. On the other hand, the company has been able to shave off some of the short term liabilities. Short term debt went down by almost $2.5 billion and accounts payable decreased by $19 million. A small decrease in accounts payable as compared to a substantial decrease in accounts receivable indicates the firm is managing the assets efficiently. In the meantime, Cisco has also been active in the acquisitions front and has made significant acquisitions in the previous two years. Cisco has the highest amount of capital expenditure in the year 2010, amounting to more than $6 billion.

Essential Ratios:

Essential Ratios

2011

2010

2009

Funds from Operations(FFO)/Total Debt

0.55

0.80

0.77

FFO/Capital spending requirements

6.23

1.56

5.52

Free Operating Cash Flow + interest expense/ Interest expense

11.31

5.30

20.36

Debt Service coverage

4.83

2.41

5.39

Cisco's funds from operations are in a healthy state right now, but an increase of almost $4 billion in its long term debt makes the ratio of funds from operations to debt look less than ideal. However, Cisco should be able to generate enough cash flows to meet its debt obligations. As it is clear from coverage ratios, the debt situation of the company is adequately covered, and there should not be any trouble in the foreseeable future. The firm has been able to generate healthy funds from operations, which should be able to cover any capital expenditure requirements.

Summary:

Cisco Systems, Inc. has been showing a healthy growth in revenues; in the most recent quarter, there was a 7% growth in revenues. A renewed focus on efficiency in operations and increasing the market size by innovative products, I believe the firm will be able to continue impressive growth in revenues. Cisco should also experience a growth in its operating cash flows and free cash flows in the coming quarters. Cisco is a market leader in the global markets, which has significantly realigned and changed its focus to meet the changing demands of the technology industry. It has a strong balance sheet and ample cash reserves to bring success to its new strategy, and change the direction of the firm successfully.

Compared to competitors, Cisco is trading at very attractive ratios. Juniper (JNPR) has a trailing P/E ratio of 36.8 and Finisar (FNSR) has a trailing P/E ratio of 30. I remain confident that this technology giant will be able to make significant strides in the future and yield healthy returns for its stock holders. Bank of America (BAC) analyst, Tal Liani is also bullish on the stock, as she suggested a target price of $24.

Source: Strong Balance Sheet Sets Cisco Up For Success