Cadence Design Systems Inc (CDNS)

Conclusion

Cadence Design Systems develops electronic design automation software, emulation hardware and silicon intellectual property used to design and verify chips, circuit boards and electronic systems. The shares closed at 336.53 USD on 2026-11-09, giving a market capitalisation of 92.3 billion USD.

The verdict is overvalued. The price-to-earnings ratio of 66.9 sits above its ten-year median of 57.7, a premium of 16.0%, and the price-to-free-cash-flow ratio of 52.4 sits above its median of 41.1, a premium of 27.5%. Enterprise value to EBITDA of 39.8 is below its median of 41.3. The DCF gives 111.08 USD per share at a discount rate of 10.38%. The fair value band runs from 162.87 to 244.30 USD with a midpoint of 203.59 USD, a margin of safety of -39.5% at the current price. The reverse DCF implies growth of 26.9% a year, against revenue growth of 14.6% a year over five years and free cash flow per share growth of 14.9%.

What holds the case up: free cash flow conversion of 127.7% on a trailing basis, a return on invested capital of 17.4% against a weighted average cost of capital of 10.2%, and net debt to EBITDA of 0.58. What would break it: the price-to-free-cash-flow premium of 27.5%, the implied growth of 26.9% that the price requires, and the margin of safety of -39.5%.

Financial health

Financial strength is green, supported by all four core tests: a current ratio of 1.36, net debt to EBITDA of 0.58, interest coverage of 15.5 and debt to equity of 0.41, with a quick ratio of 1.04. The Altman Z-score is 12.40, in the safe zone. That model was designed for manufacturers, and Cadence is a software company, so the reading is indicative only. Insolvency risk: low, about 0.15% by the estimate of the Ohlson model over one to two years, based on the 2025 year-end statements.

Earnings quality

Earnings quality is green, held up by free cash flow conversion of 127.7% on a trailing basis and 128.5% over five years, and by an accrual ratio of -0.0648, which means cash generation exceeds reported earnings. Stock-based compensation is 8.9% of revenue, and free cash flow after it is 1.22 billion USD. The share count fell at a five-year compound rate of 0.5%, reflecting buybacks. The Piotroski score is 7 of 9, and the Beneish M-score of -2.43 gives an unlikely reading for earnings manipulation. The company beat estimates in 7 of its last 8 quarters, with an average surprise of 3.8%. Next-year EPS estimates show growth of 16.9%, and their 90-day revision is 3.2%.

Profitability

Profitability is green. The operating margin of 28.9% is above its ten-year median of 25.1%, while the gross margin of 85.7% is below its median of 88.3%, and the net margin of 22.5% is close to its median of 22.4%. Return on invested capital is 17.4% against a weighted average cost of capital of 10.2%, a ROIC minus WACC of 7.2 percentage points. That return is below the five-year median ROIC of 28.3%. Return on equity is 20.1%. The 2025 DuPont split shows a net margin of 20.9%, an asset turnover of 0.52 and an equity multiplier of 1.85, so part of the equity return comes from leverage, though the balance sheet keeps that contribution moderate.

Growth

Growth is green. Revenue compounded at 14.1% over three years, 14.6% over five years and 12.0% over ten years, and revenue grew in all 10 comparable years. Earnings per share grew more slowly recently, at 9.5% over three years against 14.0% over five and 17.5% over ten. Free cash flow per share compounded at 12.6% over three years, 14.9% over five and 18.5% over ten, so cash growth has kept pace with revenue over the longer periods.

Valuation

Valuation is red, as the verdict rests on a margin of safety of -39.5%. Against their ten-year medians, the price-to-earnings ratio of 66.9 carries a premium of 16.0%, the price-to-free-cash-flow ratio of 52.4 a premium of 27.5%, and the price-to-sales ratio of 15.1 a premium of 13.7%. Enterprise value to EBITDA of 39.8 is at a discount of 3.8% and price to book of 13.4 at a discount of 6.0%. The DCF gives 111.08 USD per share at a discount rate of 10.38%, with terminal value making up 54.4% of that figure. The fair value from historical multiples is 296.09 USD. The fair value band runs from 162.87 to 244.30 USD with a midpoint of 203.59 USD. The reverse DCF implies growth of 26.9%, against 14.6% revenue growth over five years. The free cash flow yield is 1.9%. The company pays no dividend. The fair value band is an order-of-magnitude estimate built on fixed assumptions, not a price target.

Risks

The main risk is valuation itself: the price already assumes growth of 26.9% a year, well above the five-year revenue growth of 14.6%. If growth slows toward the delivered rate, the gap to the current price would persist. A fall in free cash flow conversion from 127.7% would weaken the cash case behind the DCF. Stock-based compensation at 8.9% of revenue dilutes cash earnings. The ROIC of 17.4% is below its five-year median of 28.3%, so a further decline would narrow the spread over the cost of capital. The Altman model does not fit a software business, so the insolvency reading rests mainly on the Ohlson estimate. This analysis has no debt maturity schedule and no revenue by segment, and the DCF is sensitive to its discount rate and terminal assumptions.