Financial Management: Evaluation of Cisco Systems, INC

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Introduction

Cisco Systems, Inc according to Cisco (2010) was founded in 1984 by Sandy Lerner and Len Bosack as a pioneer company in the development of the Internet Protocol based networking technologies. The firm is an international leader in the networking and internet industry as it has played an important role by changing the manner in which people connect, communicate and collaborate. As the leading player in the field of information communication technology, Cisco’s core business areas include amongst others creating and selling hardware, software and other internet-related services to diverse entities which range from small to large corporations, service providers, governments as well as consumers.

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The corporation, according to Cisco (2010), has continued to grow as it now provides its services in all continents of the world. Its headquarters is based in San Francisco of which its name is derived from (Francisco-Cisco). Since its inception, the corporation has experienced tremendous growth and development. This growth has been banked on the acquisition of other related technology companies. For instance, in 1993, the corporation acquired Crescendo Communications which had specialty in hardware making. Moreover, another big acquisition came in 1996 when the corporation acquired StrataCom, Inc. that had specialized in making switching equipment.

Nonetheless, these acquisitions strengthened its capital base since its market capitalization hit 450 billion dollars in the year 2000 which was a strong indicator for fast and positive growth in its business activities. Since then, Cisco has remained to be successful in the networking and internet industry. With the advance and development of the internet technologies, the corporation has now concentrated more on making switches and routers which form the backbone of internet structure.

Ratio Analysis

Ratio analysis is postulated by Siddiqui (2005) to be a method that is used to present financial information in a more simplified, systematic and summarized form to enable the business to measure its profitability, efficiency and financial soundness. For instance, gross profit and sales are studied and the results are presented in ratio form. In addition, current assets and liabilities are also analyzed and the results given the same ratio form. However, to be able to understand current financial performance of the corporation, ratio analysis of the preceding and current fiscal years should be undertaken. Consequently, the results need to be compared to other companies and the national or global economy in order to be in a good position to judge the financial performance of the firm.

In respect to Cisco Systems, Inc, it has consolidated financial statements which mainly include all its accounts as well as its subsidiaries (Cisco, 2010). The operations of the corporation is basically under geographical basis that are categorized under European markets, United States, Canada, Asia Pacific, Japan and other emerging markets. In all these regions, the company experienced tremendous increase in its financial performance despite major financial crises taking place. For instance, the financial crisis of 2007 to 2008 was unpalatable to most global market players but it had little consequences to Cisco Systems, Inc. The table below illustrates the breakdown of sales of the products and services of the corporation in midst of the impending economic crunch that proceeded these two fiscal financial periods (Cisco, 2010).

Year Ended July 31, 2010 July 31, 2009 Variance in dollars Variance in percentage
Net Sales:
Product
Percentage of the net sale
$32, 420
87.0%
$29, 131
80.7%
$3,289 11.3%
Service
Percentage of the net sale
$7,620
13.0%
$5, 460
19.3%
$634 9.1%
Total $40,040 $36,117 $3,923 10.9%

Table 1 depicting the Cisco’s Sales Breakdown (Source: Cisco 2010 Annual Report).

From the above table, it is evident that the company’s main sales in its market were based on products as compared to services offered. For instance, in both fiscal periods, products accounted for the highest ratio of 80.7 percent in 2009 and even increases further to 87.0 percent in 2010. However, although service sales were low as compared to products, its net sells showed increased performance from a total revenue of 5,460 million dollars in 2009 to 7,620 million dollars in 2010 although there was a drastic drop in its ratio by six percent.

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Nonetheless, Cisco business is based on geographical locations which are organized into five major geographic theaters (Cisco, 2010). Therefore, it is imperative to note that sales at these theaters are determined by different factors some of which are unique to specific regions. However, it is also important to note that sales of both products and services may continue to experience some fluctuations in the respective theaters due to several factors that relate to global financial downturn and other market uncertainty which are likely to affect the way global enterprises will spend on them.

Tellingly, geopolitical environment in respective theaters, competition and introduction of new products may play a major role in determining future sales of the corporation’s products and services. Therefore, Cisco Systems, Inc needs to strategically position its business plans in the wake of all these uncertainties to guarantee its place in internet and networking industry. To facilitate this, there is need to have both reactive and proactive measures in place to be able to deal effectively with any kind of uncertainty. The table below shows sales of products and services in respective geographical theaters for the two consecutive fiscal years.

Year ended July 31, 2010 July 31, 2009 Variance percentage
Net sales
United States and Canada
Percentage
$21, 740
54.3
$19,345
53.5%
12.4%
European Markets
Percentage of net sales
$8,048
20.1%
$7,683
21.3%
4.8%
Emerging Markets
Percentage of net sales
$4,367
10.9
$3,999
11.1%
9.2%
Asia Pacific
Percentage of net sales
$4,359
10.0
$3,718
10.3%
17.2%
Japan
Percentage of net sales
$1,526
3.8%
$1372
3,8%
11.2%
Total $40,040 $36,117 10.9%

Table 2 showing Cisco’s sales in selected theaters (Source: Cisco 2010 Annual Report).

With respect to sales in the five theaters of the corporation, the author notes that there was tremendous increase in sales in all regions in the fiscal period of 2010 as compared to the preceding fiscal period of 2009. This could be attributed to increase in demand due to the financial recovery that most parts of the global market experienced after the devastating crisis of 2007 to 2008. Nonetheless, it is evident that the corporation’s sales are majorly dominated in the United States and Canada theaters but with low concentration in the emerging markets and Asia Pacific. As a result of this, these un-concentrated regions still offer the company expansion opportunities.

Working Capital Analysis

Working capital according to Daves (2010) refers to the current assets that are used in business operations. Accordingly, working capital can be calculated by finding the difference of the organization’s current liabilities and the current assets. For this reason, to successfully analyze working capital of an entity, one has to consider the balance sheet of the company to determine the exact working capital for a given fiscal period. Therefore, the table below shows the balance sheet of Cisco Systems, Inc for the two fiscal periods of 2009 and 2010.

Year ended July 31, 2010 July 31, 2009
Current assets:
Cash and cash equivalents
Investments
Accounts receivable
Inventories
Deferred tax assets
Other current assets
$ 4,581
35, 280
4,929
1,327
2,126
3,178
$ 5,718
29,283
3,177
1,074
2,320
2,605
Total current assets 51,421 44,177
Property and equipment
Goodwill
Purchased intangible assets
Other assets
3,941
16,674
3,274
5,820
4,043
12,925
1,702
5,281
TOTAL ASSETS $81,130 $68,128
Liabilities and Equity
Current liabilities:
Short term debt
Accounts payable
Income taxes payable
Accrued compensation
Deferred revenue
Other current liabilities
$ 3,096
895
90
3,129
7,664
4,359
$ –
675
166
2,535
6,438
3,841
Total current liabilities 19,233 13,655
Long term debt
Income taxes payable
Deferred revenue
Other long term liabilities
12,188
1,353
3,419
652
10,295
2,007
2,955
539
Total liabilities 36,845 29,451

Table 3 highlighting Cisco’s balance sheet (Sources: Cisco 2010 Annual Report).

Basing on the information presented in the table, it is therefore possible to calculate working capital for the two fiscal periods. In respect to Cisco Systems, Inc., its working capital in the fiscal period of 2009 can therefore be calculate by getting the difference of the operating current assets which were valued at 44,177 million dollars and the total current liabilities which were valued at 13,655 million dollars which puts it at 30,522 million dollars. On the other hand, in the fiscal period of 2010, working capital can be arrived using the same criteria; by getting the difference of operating current assets (51,421) and the total current liabilities (19,233) which gives a working capital valued at 32,188 million dollars.

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Basing on the two fiscal periods, it is evident that working capital progressed from 30,522 million dollars in 2009 to 32,188 million dollars in 2010 which represents 5.5 percent growth rate. This is a clear indicator that the corporation’s business is progressing well since its financial base continues to increase. In addition, this also informs the corporation’s management that the firm is in the capacity to continue with its operations since it has sufficient capital to cater for its current and upcoming operational expenses.

Nonetheless, it is always the desire of any profit making organization such as Cisco System, Inc. to increase its revenues. In order to achieve this, it is relevant for the corporation to identify its inflows in order to concentrate on them. For instance, Cisco can continue to diversify its investment since it accounts for its biggest percentage of inflows. Consequently, it is also important to identify outflow and craft measures that can decrease expenses incurred from them. In this case, the firm should concentrate on ways of reducing its deferred revenue to decrease its outflow value.

Major Investments in Last Five Years

Cisco System, Inc. has a long history of expanding its business empire by making new investments and engaging partnerships that are always indented to increase its niche in the field of information communication technology globally. In order to effectively manage its investment plans, the corporation has investment strategy which guides this process. The strategy according to Cisco (2010) entail developing technologies for current and new markets and understanding the potential of its technologies both current and emerging ones.

Nonetheless, the corporation‘s investments remain to be concentrated in the United States but currently other global theaters have received significant attention in their strategy. However, before the company makes any investment, it must ensure that it is both technology and business fit. By considering all these factors, the corporation has made several investments in the past five years buts some of the major investments include:

Cisco EnergyWise (Cisco, 2010); the corporation has always strived to reduce the amount of energy consumption in their operations and products. In relation to this, it responded by investing in an energy preservation architecture in form of Cisco EnergyWise in 2006. This investment has been applauded in the market since it helps organizations reduce their operating costs and at the same point minimizing carbon release.

VMware investment; in 2007, Cisco Systems, Inc entered into inter-company collaboration and invested in VMware virtualization products which are used by Cisco networking infrastructure (Cisco, 2010). This has resulted to development of solutions that solve intersection of networking technologies and virtualization hence acting as a recipe for sales of Cisco networking products. As a result of this virtualization technology, the demand of Cisco products increased over those of other players in the networking and internet industry thus contributing to increase in sales.

Investment in Indian technology companies; in the period spanning 2008 to 2010, Cisco Systems, Inc has invested a total of 100 million dollars in these companies in the effort of solidifying its operation in Emerging Markets and Asia Pacific. For instance, through this investment plan, the corporation set up a globalization center which is intended to provide an arena for growth and development in the region and in the emerging market as well. Nonetheless, this globalization center became the second largest data center to the United State based one since its desired to serve as a focal point in the virtualization technologies.

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Financial Structure Analysis

Financial structure analysis according to Guerard (2005) involves considering the company’s capital or what is commonly referred to as financial structure which constitute all items on the credit side of the balance sheet representing its equity and all liability accounts. Nonetheless, financial structure can be commonly understood as the ratio representing total debts to total assets. This analysis helps to determine whether a company is performing since it provides liquidity status of the firm.

Therefore, to be able to analyze financial structure of Cisco Systems, Inc, its balance sheet needs to be used. However, this varies from the working capital since all assets and liabilities including both current and long term need to be put into consideration. In respect to this, the total assets of the corporation amounted to 68,128 million dollars in 2009 while its total liabilities in the same fiscal period amounted to 29,451 million dollars. As a result, available capital for the corporation in this period was valued at 38, 677 million dollars (total assets – total liabilities). In the proceeding fiscal period of 2010, the total assets of the corporation were valued at 81, 130 million dollars while its total liabilities were valued at 36,845 million dollars. Accordingly, the corporation’s capital in 2010 fiscal period was then valued at 44, 285 million dollars.

Consequently, from the capital estimates of the two respective fiscal periods, it can be affirmed that the financial structure of the corporation is stable since it keeps on increasing progressively. As a result, it can also be postulated that its business operations are performing well in the global market since there is a steady increase in its capital base in a span of one fiscal period.

Conclusion

To wind up, it is imperative to affirm that the operations of Cisco Systems, Inc are performing well in the global market. This is evident from its steady growth and increase in both working capital and overall capital base of its holdings. To add, the author established that Cisco’s growth and development can be attributed to its sound strategic plans which include viable investment plans that the corporation holds. For instance, the corporation is always sensitive in its investment policy since any kind of venture must prove to be both technology and market viable.

For that reason, it is financially healthy to invest in the Cisco System, Inc. since the corporation has a gleam future as evidenced by its stability, growth, development and profitability which can be accredited to numerous factors. For example, the corporation has sound strategic plans that aim to guide it against any uncertainty. In addition, the market niche of its products and services keep on increasing since there are numerous global regions that have not been tapped. It is therefore evident that its business operations will not be constrained by stiff market competition in the near future. To end, the author acknowledges that the corporation has a competitive advantage over other players in the industry based on its unique brand and its economies of scale not to mention its sound decision of embracing information communication technology in its operations.

References

Cisco. (2010). 2010 Annual Report. Web.

Daves, B. (2010). Intermediate Financial Management. 10th ed. USA: South-Western Cengage Learning.

Guerard, J. ( 2005). Corporate Financial Policy and R&D Management. USA: John Wiley & Sons, Inc.

Siddiqui, S. A. (2005). Managerial Economics and Financial Analysis. New Delhi: New Age International Limited Publishers.

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