Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Insmed Incorporated (NASDAQ:INSM) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Insmed's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2019 Insmed had US$335.9m of debt, an increase on US$316.6m, over one year. However, it does have US$487.4m in cash offsetting this, leading to net cash of US$151.5m.
A Look At Insmed's Liabilities
Zooming in on the latest balance sheet data, we can see that Insmed had liabilities of US$85.2m due within 12 months and liabilities of US$395.4m due beyond that. On the other hand, it had cash of US$487.4m and US$19.2m worth of receivables due within a year. So it actually has US$26.0m more liquid assets than total liabilities.
This state of affairs indicates that Insmed's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.65b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Insmed 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 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.
In the last year Insmed wasn't profitable at an EBIT level, but managed to grow its revenue by 1288%, to US$136m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Insmed?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Insmed had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$293m of cash and made a loss of US$254m. But at least it has US$151.5m on the balance sheet to spend on growth, near-term. Importantly, Insmed's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Insmed you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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