Ciena Corporation (NYSE: CIEN)

Giving you a better insight into financial statements. Take a look at key metrics relating to this companies financial statements over the last 9 year. Gross profit margin, Expenditure to earnings, the important ones are covered here in a really easy to view way using graphs to help you spot trends.


I will be looking at what I consider to be the key areas of this company's financial statements over the last 9 years. Please bear in mind that this is not financial advice and you should not base your trading/investing activity off of it, always do your own research before investing.








Revenue

Revenue for this company looks good. As we can see in the graph, revenue has been steadily increasing with time.







Gross Profit Margin


We want to try and identify companies with consistently high Gross profit margin, as this could indicate a company with good economics over the long term that may be working in their favour. Companies with volatile or consistently low gross profit may be struggling, but ultimately this changes depending on industry and ideally this should be used to compare with other companies like it. In this case gross profit is pretty healthy. Consistent around 40%.


Sales, General & Administrative


Again when it comes to trying to find a company with a "durable competitive advantage" (as Warren Buffett refers to it), consistency is something we like to see. Companies that have volatile SGA which fluctuate a lot tend to be companies suffering from intense competition. Also if SGA costs are high, that means the company is eating away at its gross profits. Generally speaking, the lower the SGA costs the better, and the less volatile the better still. It is nice to see SGA trending down here, and consistently.


Depreciation to Profit


As machinery or equipment cycles through its expected life span, its value decline is recorded by a company as depreciation. For example, if a piece of equipment was purchased at $1 Million and is expected to have a life of 10 years, the company will record that as a $100,000 depreciation per year. What we want to look for then are companies that have lower depreciation costs when compared to profits. This indicates to us that there is a likely internal efficiency, as well as a probable reduced need to constantly replace machinery. Again it is good to see depreciation coming down over time. It has been a little high in the past, but overall this looks good to me.


R&D Spend to Profit


Companies with a competitive advantage achieve that advantage somehow, either through some technical process or by patent for example, and it usually costs a lot of money to do so. However some companies are able to hold their advantage easily while others constantly have to pour cash into staying ahead or catching up. So companies that have to constantly spend large amounts on R&D could be seen as companies in a highly competitive environment. For these companies it may not take much to lose their lead and this is especially try of certain industries such as auto makers or tech. So what we would like to look for (ideally) is a company that doesn't need to spend a great deal of its profits on R&D. Although R&D has been decreasing here, and current levels look ok, personally I think the last 9 years as an average haven't been too great. But the trend looks promising, so I would say this is worth keeping an eye on.


Interest to Profit


Interest paid out on debt; when compared to profit, gives us an idea of how affordable the interest payments for this company are. If a company is paying a lot of interest compared to its profits, it can spell danger. So to find a company that can easily afford its payments, we want to see this ratio as low as possible. Personally I like to see anything under 10% of profits go to interest payments. Anything under 6% would be great and no payments what so ever i.e. no debt, would be fantastic. The level of interest paid by this company over the last 9 years has always been pretty low. As mentioned anything under 6% I consider really good and what's more its been falling still.





Net Income


Net income shows the amount we have left after expenses and taxes have been accounted for. Obviously we want to see a positive figure here, but also, we would like to see consistency. If there is a gradual upward trend over the years even better. Despite revenues looking strong, net income looks a bit more volatile here. An upward trend is a welcome sight, but I feel like this should be higher. Still I would say this feels promising and is another metric we need to keep an eye on.


Earnings to Revenue


This metric compares net income to revenue. This is useful in showing us how well a company is able to make money. If their earnings are only a tiny part of revenue, that means a large amount of money is lost in operating expenses, interest payments or tax for example. So ideally we would like to see an earnings to revenue ratio above 20%. What's more we also want to see that consistency.


Cash Ratio

Cash and cash equivalent's refers to liquid assets that the company holds. These are usually cash and bonds. As this asset is highly liquid, it can be used very quickly. However it also doesn't do much. A bit like having uninvested cash in your broker account, it is beneficial to have but also not ideal if you have a very large sum just sitting doing nothing or very little. Personally I like to see a level of cash that goes somewhat towards current liabilities (in the region of around 0.25) Within the range of 1, I really like this company's cash ratio. It also seems fairly stable. There is a slight down trend but it isn't really a reliable indicator in this case in my opinion. I'm very happy with this.







Current Ratio

Current ratio is a popular metric used by analysts that takes all current assets and compares them to current liabilities. If this number is 1 or above it indicates that all assets that can be liquidated with a year (current in accounting terms usually refers to a year period) are equal or greater than all the current liabilities. A company with a ratio lower than 1 may be in a tight spot when it comes to whether they can afford their liabilities (which include things such as short term debt payments, tax, payable invoices etc). Just like the cash ratio, the current ratio is also very good here. A bit more of a down trend but I wouldn't have any concerns with this right now.


Short term debt to Long term debt ratio


Short term debt refers to money the company borrows that needs to be repaid in 1 year. Companies that borrow a lot of short term debt tend to be at the mercy of sudden economic changes. A lot of banks have spelled disaster for themselves by borrowing too much short term debt. The safest way to borrow is to borrow long term, so we like to see a company with little short term debt in comparison to long term. It seems this company keep short term debt in check, with periodical increases but ultimately return to very healthy levels.


Long term debt to equity

This is a simple metric which shows how much debt the company has in relation to their net worth. If this figure is close to 1 that would indicate that the company may be borrowing too much and may be considered a risky company. Long term debt in 2011 has been extremely high compared to the company's equity, and this is a concern, however this seems to have been a one off. Having said that, there have been a few years that have been high that are hard to see in this graph. 2010 had a ratio of 9.08, 2015 was 2.05 and 2016 was 1.33.





Short term debt to equity

Is essentially the same as long term debt to equity. A higher ratio may pose liquidity concerns for this company. Again it looks like short term debt isn't used much and remains at very healthy levels throughout.


Years to pay off debt


This metric compares long term debt to net earnings. It looks to give us an idea of how long it would take the company to pay off its long term debt using net earnings. Warren Buffett has historically chosen companies that could pay off their debt within 3 or 4 years. If it wasn't for 2015, this would look pretty good to me. It turns out this is when this company started breaking a profit, and because previous years were negative in terms of earnings, the chart is somewhat distorted. As earnings for that year were only $12 Million and debt was quite high, we get a big spike. Future years have seen earnings increase and debt reduce so I would say this is pretty acceptable.


Retained earnings


After net earnings a company has a choice, it can pay dividends with its earnings, buy back shares, retain its earnings to help grow the business, or a little bit of each. In general, the more a company adds to its retained earnings, the higher its growth rate for future earnings will be. An increasing pool of retained earnings is a show of strength as well as advantage. Therefore we would like to see a steady increase in retained earnings over the years. If there is a sudden dip in this, we need to ask why. Because this company has been recording a loss up until 2015, this has driven retained earnings down. As we can see in more recent years though, this company have been retaining some of their earnings and growing the pot. Overall this isn't currently a metric I would say looks good, but future years would hopefully show a continued growth in this regard.


Treasury Stock


When a company buys back shares, it can either cancel those shares or it can retain them. Great companies with plenty of cash like to buy back shares, so we would very much like to see an increasing amount of treasury stock (this is held as a negative number on the balance sheet, so we are looking for the negative figure to increase i.e. -$100 becomes -$200. For our graph we decided to convert treasury stock into a positive figure, therefore when looking at this graph you should be looking for a steady increase over time to the up side. It doesn't surprise me that this company doesn't yet have any treasury stock in its balance sheet. Maybe one day we will see it retain any shares it choses to buy back.


Return on shareholders equity


This is the value we get when we divide net earnings by shareholder equity. In our calculation we also account for treasury stock so the calculation is Net earnings divided by the total sum of shareholders equity and treasury stock. As a general rule, we want to see a company that is able to generate high returns. If returns in this metric are consistently low, I would stay away. What we would prefer to see are consistently high returns. In this case returns don't look great. I would say 4 out of the last 9 years look very good but currently there is just too much volatility, the last 3 year alone went from 59% to -18% then back up to 11%.


Expenditure to earnings


If capital expenditures remain high they begin to have an impact on earnings. A stable, well run business will tend to have low expenditure compared to earnings. So we would rather look for companies like this than companies that constantly require huge amounts of cash to operate. If a company is using close to all its earnings on capital expenses it spells trouble. What we would prefer to see then is a company ideally using less than half its earnings. Anything less than 25% I would consider to be very good indeed. This metric isn't very reliable in this case as there have been many loss making years. The profitable years have mostly seen high expenditures to earnings however, such as 2015, 2016. That said 2017 and 2019 have been fairly good.


So now that we have reviewed some of the key metrics for this company, why not comment below and let us know what you think about this company. As always, you should always do your own research, and I would recommend if you like this content and want to analyse financial statements in this way, that you read the book linked below.





Source of financial data: quickfs.com


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