💻 Calculating Cadence Design System's return on capital

Cadence Design Systems (Ticker: CDNS) produces electronic design automation (EDA) software that is used to design semiconductors. This is what one of their products, Allegro, looks like:

Cadence is a great example for discussing the optimal method for calculating the "cash return on capital".

The equation I use for calculating the cash return on capital is:

This tells us exactly how much cash is being generated for every dollar of capital invested into the business.

We will now look at how we calculate each part of the equation. All the numbers used here can be found in Cadence's most recent annual report, which they filed with the SEC on 19 February.

1. Step One - Calculate Free Cash Flow (FCF)

We will start with FCF.

"Free Cash Flow" is the cash left over once a company has covered all its cash expenses, and represents the money available to both shareholders and debtholders.

Here's the equation we will be using: