Cadence Design Systems Inc. (NASDAQ:CDNS) Passes the "Caviar Cruise" Quality Investing Screen

For investors aiming to assemble a portfolio of lasting, superior businesses, the ideas of quality investing present a strong framework. This method centers on finding companies with lasting competitive strengths, sound financial condition, and the capacity to produce high returns on capital over many years. The "Caviar Cruise" stock screen puts this thinking into practice by selecting for firms with a record of steady revenue and profit increase, high returns on invested capital, good cash flow generation, and reasonable debt. The aim is not to locate short-term discounts, but to uncover outstanding businesses fit for lasting ownership.

One firm that appears from this strict screening is CADENCE DESIGN SYS INC (NASDAQ:CDNS). As a top supplier of electronic design automation (EDA) software, semiconductor intellectual property (IP), and system design tools, Cadence operates at the important junction of the worldwide semiconductor and electronics creation environment. Its software is necessary for designing the chips and systems that enable progress in artificial intelligence, cloud computing, automotive, and telecommunications.

Matching the Main Standards for Quality

The Caviar Cruise screen uses a number of measurable filters to find quality prospects. Cadence Design Systems shows clear agreement with these important measures, which are basic to the quality investing argument.

• Continued and Profitable Increase: The screen demands at least 5% yearly increase in both revenue and EBIT (earnings before interest and taxes) over five years. Cadence greatly passes this minimum, with a 5-year revenue CAGR of 11.9% and a notable EBIT CAGR of 22.7%. Importantly, its EBIT increase is faster than its revenue increase, a sign of better operational effectiveness and possible pricing strength, a characteristic of a quality business with a competitive edge.

• High Capital Allocation (ROIC): A key part of quality investing is a high Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The screen selects for an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Cadence states a number of 60.8%, showing a very efficient and profitable business model. This high return indicates the company holds important competitive strengths in its area.

• Financial Stability and Cash Flow Soundness: Quality investors look for financial might and the capacity to turn accounting profits into actual cash.

  • Debt Handling: The screen uses a Debt-to-Free Cash Flow (FCF) ratio below 5. Cadence’s ratio of 1.7 is very good, meaning it could clear all its debt with under two years of present cash flow, showing a very solid balance sheet.
  • Profit Soundness: This measure, the 5-year average of Free Cash Flow to Net Income, must be above 75%. Cadence has a number of 128.6%, meaning it creates more free cash flow than its stated net income. This outstanding cash generation gives great room for strategic spending, shareholder rewards, or handling economic slowdowns.

A Look at Basic Financial Condition

A check of Cadence’s detailed basic analysis report supports the screening outcomes. The company receives a good total score, with specific high points in profitability and increase.

• Profitability is a main high point, with top industry positions for Operating Margin (31.6%), Gross Margin (85.6%), and Return on Equity (20.4%).
• Financial Condition is good, helped by solid liquidity ratios (Current Ratio of 3.05) and the low debt load noted by the screen.
• Increase is strong, with double-digit percentage increase in both revenue and earnings per share (EPS) over the last year and a five-year span. Experts also forecast continued revenue and EPS increase in the low-to-mid teens for the next few years.
• Valuation is a point to note. The report states that the stock sells at high earnings multiples next to the wider S&P 500. This is common for high-quality, high-increase companies, and the review proposes the exceptional profitability may support a higher price-to-earnings ratio for investors centered on lasting quality.

The Non-Quantitative Argument for a Quality Asset

Apart from the figures, Cadence’s business model fits with several non-quantitative features wanted by quality investors. The company works in a field with high obstacles to entry because of great technical difficulty and established client connections. Its tools are essential for its customers, making a "sticky" repeating revenue flow. Also, it is tied to lasting, wide trends like the spread of semiconductors in all parts of the economy, the growth of AI, and the need for more complex chip design. This places the business for importance and increase without regard to near-term economic changes.

Finding Other Quality Prospects

Cadence Design Systems shows the kind of company the Caviar Cruise screen is made to find: one with a record of profitable increase, high returns on capital, and a very solid financial state. For investors wanting to see the present list of firms that pass this quality-centered screen, you can view the live screener setup here: Caviar Cruise Stock Screen.

---

Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. The analysis uses data and a particular screening method; investors must do their own complete research and think about their personal financial situation before making any investment choices.