CADENCE DESIGN SYS INC (NASDAQ:CDNS) – A Quality Stock with Strong Fundamentals

CADENCE DESIGN SYS INC (NASDAQ:CDNS) stands out as a strong candidate for quality investors, meeting key criteria for revenue growth, profitability, and financial health. The company, which provides software and hardware for semiconductor design, has demonstrated consistent performance and efficient capital allocation.

Why CDNS Fits the Quality Investing Criteria

• Strong Revenue and EBIT Growth
  Over the past five years, CDNS has delivered a revenue growth CAGR of 9.79%, while EBIT growth has been even more impressive at 22.65%. This indicates not only top-line expansion but also improving operational efficiency.

• High Return on Invested Capital (ROIC)
  With an ROIC (excluding cash and goodwill) of 60.56%, CDNS far exceeds the 15% threshold for quality stocks. This suggests the company generates substantial returns from its investments.

• Healthy Debt Management
  The debt-to-free cash flow ratio stands at 1.80, meaning CDNS could repay its debt in less than two years using current cash flows. This reflects strong financial discipline.

• Profit Quality
  The five-year average profit quality is 128.61%, indicating that net income is more than fully converted into free cash flow—a sign of reliable earnings.

Fundamental Analysis Summary

CDNS earns a solid 7 out of 10 in our fundamental rating, with particularly high scores in profitability (9/10) and financial health (7/10). Key strengths include:

• Profit Margins: Operating margin of 30.60% and gross margin of 85.86%, both well above industry averages.
• Liquidity: Current ratio of 3.07 and quick ratio of 2.90 demonstrate ample short-term financial flexibility.
• Valuation: While the stock trades at a premium (P/E of 50.33), this is partly justified by its growth prospects and industry position.

For investors seeking high-quality companies with durable competitive advantages, CDNS presents a compelling case.

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Disclaimer

This is not investing advice. The observations here are based on data available at the time of writing. Always conduct your own research before making investment decisions.