1 Abstract:
This report evaluates the financial position of Cisco Systems Ltd by analyzing the financial statements of the company using key ratios and to identify the value drivers of the company, which will serve as a stepping stone to remedial measures of the company.
2 Introduc tion
Cisco Systems, Inc., the company based in San Jose, United States is the world leader in Information Technologies' networking sector. The company was founded in 1984 and has the total employee count of 63,000 as on June 2009. Cisco designs and produces several network related devices such as Routers, Switches, VOIP Telephony and more products which are used for data and voice transmission over the network. Cisco's operations are categorized into two offerings: products and services. It holds a strong position in the Information Technology sector market. It provides business services to enterprises, public institutions and meager presence in the consumer market. The products designed by Cisco Systems are distributed under five major categories, namely Cisco, Linksys, IronPort, WebEx and Scientific Atlanta. Cisco has partnered with various Information Technology companies such as Accenture, IBM, Oracle, SAP, Tata Consultancy Services and many more and also completed many acquisitions in the recent past. Cisco's independent accountants are PricewaterhouseCoopers LLP (San Jose, California).
3 Historical Position
Cisco went public on February 16, 1990 at a split-adjusted price of about 6 cents. Stock Price of Cisco showed a positive flow till 2008 and it showed a slight variation in the prices during mid 2008 and early 2009 due to the financial meltdown.
Source: Data's from Cisco Web
Cisco's presence in the globe has been categorized into five segments ('theater' in terms of Cisco terminology): United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The Emerging Markets theater consists of Eastern Europe, Latin America, the Middle East and Africa and Russia and the Commonwealth of Independent States.
The company has reported overall revenue of (US Dollars) 36,117 million (inclusive of products and services) during the fiscal year ended 2009, a decrease of 8% over 2008. The net profit of the company was 6,117 million, a decrease of 23% over 2008 which is primarily due to lower revenue.
Cisco's cash and cash equivalents along with investments were $35,117 million during the fiscal year 2009, an increase of 33% over 2008 which specifies the strong cash position and cash flow in the company.
Source: Data's from Cisco Web
4. Ratio Analysis
Ratio analysis is an important technique of financial analysis as it is a means of judging the financial health of the company. The key ratios are derived from the company's financial statements, the level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. It can be expressed as a proportion of two figures or as a percentage or as a rate of times. Interpretation of ratios can be done either by comparing it with the ideal/past (Horizontal) ratios or by taking help of some related ratios or by comparing with the ratios of other firms (Vertical) (Atrill & McLaney, 2008).
4.1. Horizontal Analysis
Horizontal analysis is the time series analysis in which the company's key ratios are compared with the earlier years. Since Cisco Systems is a product based company, the following key ratios are identified and explored.
4.1.1 CURRENT RATIO:
Current ratio is also known as 'Working Capital Ratio' as it is a measure of working capital available at a particular time (http://www.investopedia.com/terms/c/currentratio.asp). Current Ratio establishes relationship between current assets and current liabilities. Current Ratio of the firm measures its short-term solvency, which indicates the rupees of current assets available for each rupee of current liability. The current ratio represents a margin of safety for creditors. It is generally believed that 2:1 ratio shows a comfortable working capital position.
Formula:
Current Ratio =
Current Assets
Current Liabilities
Source: Data's derived from Cisco's Web
Analysis:
The current assets of Cisco have been increased by 24% during 2008-2009 which specifies the ability of the company to meets its obligations & therefore from the point of view of creditors the company is less risky. From the above figure, the fact is depicted that the liquidity position of Cisco is satisfactory because all the four years current ratio has never fallen below the standard ratio 2:1 and hence proves the financial stability of the company.
4.1.2 GROSS PROFIT MARGIN RATIO:
The gross profit margin reflects the efficiency with which management produces each unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue.
Formula:
Gross Profit Margin Ratio =
Gross Profit
X 100
Sales Revenue
Analysis:
Gross Profit for Cisco has decreased during 2009. This is majorly due to the economic downtown in the financial market and hence the sales revenue decreases. It could also be possible by adapting low priced strategy with the increase in sales discount to boost up the sales.
As a recommendation, Cisco has to focus more on cost cutting activities, either increase the margins, if possible, or increase the overall sales by proper marketing strategy.
4.1.3 SALES, GENERAL AND ADMINISTRATIVE (SG&A) RATIO:
SG&A percent represent the percentage of revenue which is spent on the cost of operating the business that are not associated with manufacturing the products.
Formula:
SG&A Ratio =
Sales, General & Administrative
Revenue
Analysis:
SG&A expense during 2009 has decreased, but increased as a percentage of revenue. Analyzing deeply on Cisco's Income Statement reveals that Cisco has reduced its R&D, Sales and General Administrative expenses for the year 2009. The change in variation of total SG&A value is -226 in dollars when compared to the year 2008 which specifies that Cisco has been able to keep its non-manufacturing expenses under control so that they increase at the same rate as revenue.
4.1.4 DAYS SALES OUTSTANDING (DSO) RATIO:
DSO ratio is alternative known as "Accounts Receivable Turnover Ratio" which measures the collectability of debtors & other accounts receivable, it means the rate at which the trade debts are being collected.
Formula:
DSO Ratio =
Accounts Receivable
X 365
Sales Revenue
Analysis:
The accounts receivable, net value of Cisco was $3821 in 2008 and it was decreased to $3177 during 2009. Though there is a decline in accounts receivable value which is majorly due to lower sales revenue, Cisco has managed to maintain the same level of collection period as that of previous year and this avoided a major impact on the companies' cash flow.
4.1.5 INVENTORY TURNOVER RATIO:
Inventory turnover ratio reflects the efficiency of inventory management. It indicates the number of times inventory is sold during the year. The higher ratio, efficient the management of inventory and vice versa in the organization.
Formula:
Inventory Turnover =
Cost of Goods Sold
Inventory
Analysis:
The inventory turnover ratio for Cisco have decreased in the year 2008-09 because of decrease in the sales revenue which indicates that its performance in terms of generating cash flow has been decreased. This is where Cisco failed to read the global environmental changes that prevailed in the market. As a recommendation, Cisco needs to follow the 'Pull' Strategy i.e. manufacture the products based on consumer demands rather than following the current 'Push' Strategy i.e. pushing the manufactured products into the market.
4.2 Vertical Comparison
Comparing Cisco's financial records with its competitor Juniper Networks reveals that Cisco's financial health is more stable. It has got highest gross profit, operating margin and has the lowest operating costs (% of sales) when compared to Juniper Networks. Furthermore, Cisco has spent more on Research & Development activities when compared to its competitors which actually can drive innovation of new products that helps in fetching more orders and hence increases the revenue.
Company
Revenue
$(millions)
COGS
$(millions)
Gross Margin
%
Operating Margin %
R&D Expenses $(millions)
Cisco Systems
9021
3133
65.26
20.01
1224
Juniper Networks
823.9
286.7
65.20
15
185.2
Source: Reuters
7. Conclusion
