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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Insmed Incorporated (NASDAQ:INSM) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Insmed's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Insmed had US$351.1m of debt, an increase on US$331.0m, over one year. However, it does have US$588.8m in cash offsetting this, leading to net cash of US$237.6m.
How Healthy Is Insmed's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Insmed had liabilities of US$83.9m due within 12 months and liabilities of US$399.8m due beyond that. Offsetting these obligations, it had cash of US$588.8m as well as receivables valued at US$15.2m due within 12 months. So it actually has US$120.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Insmed could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Insmed has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Insmed 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.
Over 12 months, Insmed reported revenue of US$169m, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Insmed?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Insmed lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$215m and booked a US$245m accounting loss. But at least it has US$237.6m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Insmed may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Insmed , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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