Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Inspire Medical Systems, Inc. (NYSE:INSP) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Inspire Medical Systems's Net Debt?
As you can see below, Inspire Medical Systems had US$24.4m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$158.6m in cash to offset that, meaning it has US$134.2m net cash.
A Look At Inspire Medical Systems's Liabilities
The latest balance sheet data shows that Inspire Medical Systems had liabilities of US$8.66m due within a year, and liabilities of US$24.4m falling due after that. On the other hand, it had cash of US$158.6m and US$9.47m worth of receivables due within a year. So it actually has US$135.0m more liquid assets than total liabilities.
This surplus suggests that Inspire Medical Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Inspire Medical Systems boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Inspire Medical Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Inspire Medical Systems wasn't profitable at an EBIT level, but managed to grow its revenue by67%, to US$64m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Inspire Medical Systems?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Inspire Medical Systems had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$31m of cash and made a loss of US$25m. While this does make the company a bit risky, it's important to remember it has net cash of US$134.2m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Inspire Medical Systems may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Inspire Medical Systems's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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