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Cisco Systems Inc. (CSCO)
Analysis of Investments
Difficulty: Advanced
Investment Accounting Policy
Available-for-Sale Investments
Cisco classifies the investments in both fixed income securities and publicly traded equity securities as available-for-sale investments. Fixed income securities primarily consist of U.S. government securities, U.S. government agency securities, non-U.S. government and agency securities, corporate debt securities, and U.S. agency mortgage-backed securities. These available-for-sale investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of fixed income and public equity securities sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (AOCI), net of tax. Cisco classifies the investments as current based on the nature of the investments and their availability for use in current operations.
Other-than-Temporary Impairments on Investments
When the fair value of a debt security is less than its amortized cost, it is deemed impaired, and Cisco will assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) Cisco has the intent to sell the security, (ii) it is more likely than not that Cisco will be required to sell the security before recovery of the entire amortized cost basis, or (iii) Cisco does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (ii) described earlier, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (OCI).
Cisco recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of a security below the respective cost basis is judged to be other than temporary. Cisco considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in privately held companies are included in other assets in the Consolidated Balance Sheets and are accounted for using either the cost or equity method. Cisco monitors these investments for impairments and make reductions in carrying values if Cisco determines that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.
Source: 10-K (filing date: 2018-09-06).
Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities
Cisco Systems Inc., adjustment to Net Income
USD $ in millions
Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).
Adjusted Ratios: Mark to Market Available-for-sale Securities (Summary)
Cisco Systems Inc., adjusted ratios
Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Cisco Systems Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 and from 2017 to 2018. |
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by shareholders’ equity. | Cisco Systems Inc.’s adjusted ROE deteriorated from 2016 to 2017 and from 2017 to 2018. |
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by total assets. | Cisco Systems Inc.’s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018. |
Cisco Systems Inc., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).
2018 Calculations
1 Net profit margin = 100 × Net income ÷ Revenue
= 100 × ÷ =
2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenue
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted net profit margin | An indicator of profitability, calculated as adjusted net income divided by revenue. | Cisco Systems Inc.’s adjusted net profit margin deteriorated from 2016 to 2017 and from 2017 to 2018. |
Adjusted Return on Equity (ROE)
Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).
2018 Calculations
1 ROE = 100 × Net income ÷ Total Cisco shareholders’ equity
= 100 × ÷ =
2 Adjusted ROE = 100 × Adjusted net income ÷ Total Cisco shareholders’ equity
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROE | A profitability ratio calculated as adjusted net income divided by shareholders’ equity. | Cisco Systems Inc.’s adjusted ROE deteriorated from 2016 to 2017 and from 2017 to 2018. |
Adjusted Return on Assets (ROA)
Based on: 10-K (filing date: 2018-09-06), 10-K (filing date: 2017-09-07), 10-K (filing date: 2016-09-08), 10-K (filing date: 2015-09-08), 10-K (filing date: 2014-09-09), 10-K (filing date: 2013-09-10).
2018 Calculations
1 ROA = 100 × Net income ÷ Total assets
= 100 × ÷ =
2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Adjusted ROA | A profitability ratio calculated as adjusted net income divided by total assets. | Cisco Systems Inc.’s adjusted ROA deteriorated from 2016 to 2017 and from 2017 to 2018. |