Case analysis

Cisco Systems INC.

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Company overview:

Cisco Systems, Inc. is an American multinational technology founded in 1984 and headquartered
in San Jose, California, in the center of Silicon Valley. Cisco develops, manufactures and sells networking
hardware, software, telecommunications equipment and other high-technology services and products.
Through its numerous acquired subsidiaries, such as OpenDNS, Webex, Jabber and Jasper, Cisco
specializes into specific tech markets, such as Internet of Things (IoT), domain security and energy
management. Cisco is incorporated in California.

Financial analysis of Cisco:

Financial analysis is the examination of a business from a variety of perspectives in order to fully
understand the greater financial situation and determine how best to strengthen the business. A
financial analysis looks at many aspects of a business from its profitability and stability to its solvency
and liquidity.

In the case, it is mentioned that an investor named Adam Stark was about make a decision
regarding investing in Cisco Systems Inc. To evaluate his decision of Cisco stock investment, we need to
look at financial scenario based on given income statement.

There are three types of financial analysis available to drill down the income statement, which is:

 Vertical analysis: Vertical analysis is the proportional analysis of a financial statement, where
each line item on a financial statement is listed as a percentage of another item. Here each item
in the income statement is expressed as a percentage of sales.
 Horizontal or trend analysis: Here same financial item of two consecutive years is compared and
the difference is shown as a percentage. It is a useful tool to evaluate the trend situations.
 Ratio analysis: This type of analysis provides meaningful relationships between individual values
in the financial statements. The three most important and relevant ratios to income statements
are gross profit, operating profit and net profit margin.

For financial analysis and interpretation, last ten quarters of Cisco Systems Inc. has been taken for
calculation ranging from quarter ending 10.26.2013 to 01.23.2016.

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 Vertical analysis of Cisco Systems Inc.

Interpretation:
0,5
 The lower the better is the
Total cost of sales

0,4 figure.
0,3  Cost of sales as a
percentage of sales did not
0,2
fluctuate a lot.
0,1  It was highest in 1st
quarter of 2014.
0
1 2 3 4 5 6 7 8 9 10 11  It is stable in the last two
0 39% 47% 39% 40% 40% 41% 38% 40% 38% 38% quarter to 38%.

GROSS MARGIN Interpretation:

64%
62%  The higher the number,
60% the better for company.
58%  Highest % was in last two
56% quarters.
54%  Over all did not fluctuate
52% that much which is good.
50%
48%
1 2 3 4 5 6 7 8 9 10 11
GROSS MARGIN 61% 53% 61% 60% 60% 59% 62% 60% 62% 62%

Interpretation:

 The lower the number,

the better.
 Operating expenses as a
% of sales is lowest in the last
quarter.

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Interpretation:

 Higher figures depict

betterment of company.
 It was lowest in Qtr ending
Jan 2014.
 However, there was
gradual improvement and stability
over last five quarters.

Interpretation:

 The higher the better.

 There was unusual
improvement in net come % in last
quarter.
 Though sales was lower in
last quarter than second last
quarter, its achievement in
reducing operating expenses
result in good % net income
figure.

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Horizontal analysis

Interpretation:

 The higher the better.

 High sales reduction in
the last two quarters, specially
drop in product sales.
 Not a good sign as it
might reduce market share and
growth.

Interpretation:

 Target should be to keep

this figure as low as possible.
 Cost of sales increased
heavily in third last qtr.
 Overall high fluctuation
of the ratio which should be
stable.
 Last qtr cost of sales
reduced by 7% as with 6% drop
in sales.

Interpretation:

 This figure should be

higher.
 There was positive
growth in second and third last
quarters.
 But drop in sales result in
negative growth of gross margin
by 5% in last qtr.

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Interpretation:

 The lower, the better.

 Here lies the great
achievement of the company as
last qtr operating expenses got
down by 13% whereas revenue
and cost of sales reduced by 6%
and 7% respectively.
 Cisco should continue to
keep this expense under control.

Interpretation:

 The higher the better.

 Operating income was
dropped to the lowest by 32% in
the qtr ending Jan 2014. After that
it jumped heavily to 52%
 Overall there was heavy
fluctuation in %.
 In the last qtrs, there was
stable increase (7%) from previous
figure despite drop of sales as
because of lower operating
expenses.

Interpretation:

 Increase in last qtr by 30%

is mainly due to EBIT or operating
margin and low provision for
income tax (there might be
changes of income tax rules in the
last qtr)
 Company should try to
keep it stable as previous qtr there
was only increase of 5% and before
that there was decrease of 5%
which means high volatility.

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 Ratio analysis:

Formula:

 GP margin=(GP/sales)
 Operating profit margin=(Operating
profit/sales)
 Net profit margin=(net income/sales)

Interpretation:

Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate
earnings relative to its revenue, operating costs and net profit over time, using data from a specific point
in time. Here three profitability ratios are used to assess the company’s performance regarding to its
sales.

 Gross profit margin has been stable for the last two quarters which is expected. There was a
major drop in quarter ending Jan 2014 from previous by 8%. Beside this, overall scenario is not
bad in terms of gross profit margin ratio.
 Despite of sales negative growth, operating profit margin has been highest in the last quarter
which should be continued for some periods to make investors confident. The figure was lowest
in qtr ending Jan 2014 as like GP margin due lowest sales growth. Overall the ratio has been
maintaining an increasing trend.

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 Net profit margin was lowest in qtr ending Jan 2014 and highest in last qtr (26%). There was an
increase by 8% from second last qtr due to efficiency in operating expenses and lower provision
for income taxes.

Overall Scenario:

 If we look at profitability, Cisco Systems Inc. is in a good shape to invest as all the ratio shows a
positive or stable trend for the last couple of quarters.
 Company has been successfully able to keep its operating expenses mainly sales, marketing and
general admin expenses low to get the best possible results from revenue in the last quarter.
But they have to carry the trend for anther few quarters to gain investor confidence.
 Company has a very high interest coverage ratio, which means most of the investment is equity
financed rather than debt. It means slow growth strategy rather than issuing more debt and
investing heavily for the purpose of speedy growth.
 If we look at sales revenue figures, it is very disappointing for Cisco to generate lower sales in
the last two quarters. Overall there was up and down as well as great volatility in generating
sales especially for the product selling portion if we look at the last ten quarters. It is the major
point Cisco needs to look at.
 There might be a link between sales reduction and cutting down the operating expenses.
Though lowering the marketing and sales expenses result in higher profitability, it might also
cause to drop in product sales as lower marketing expenses means lower promotional
campaign, advertising costs to attract new customer base. Also there might be less effort from
marketing staff if the sales incentive gets reduced in an effort to lower operational expenses.
 There is also lowering of research and development expenses. But R&D is required to exploit
new product development and new growth & market opportunities. Operating cost reduction
initiative may conflict with new sales opportunities if not balanced properly.
 Provision for income taxes has been drastically low in the last quarter compared to other
quarter which also has the contribution towards generating higher net profit margin. The
income tax figure for the last qtr also needs to be looked at for the accuracy.

Recommendation:

 Mr. Adam Stark should also consider the current stock price movements of Cisco Systems Inc. to
have an investment insight along with EPS, P/E ratio, dividend policy and company future
investment and growth strategy.
 Though profitability is good for the company, slow growth and revenue has a great concern as if
the negative revenue growth continues; profitability will ultimately also drop in the long run.
 As a final decision, I would suggest that Adam Stark either go for wait and observe strategy for
another couple of quarters to see if the revenues get upward trend and there is sign of long
term investment and growth prospect. Or he can progress slowly by investing a little amount so
that any risk to be minimized in case company fails to meet the objective in future.

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 Bibliography:

 https://www.wikipedia.org/
 https://www.investopedia.com/
 https://www.cisco.com/ (Cisco Systems Inc. official website)