These 4 Measures Indicate That Insperity (NYSE:NSP) Is Using Debt Safely

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.' 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. We can see that Insperity, Inc. (NYSE:NSP) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Insperity

How Much Debt Does Insperity Carry?

The chart below, which you can click on for greater detail, shows that Insperity had US$369.4m in debt in March 2023; about the same as the year before. But on the other hand it also has US$732.1m in cash, leading to a US$362.7m net cash position.

A Look At Insperity's Liabilities

The latest balance sheet data shows that Insperity had liabilities of US$1.30b due within a year, and liabilities of US$603.6m falling due after that. Offsetting these obligations, it had cash of US$732.1m as well as receivables valued at US$607.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$567.1m.

Given Insperity has a market capitalization of US$4.62b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Insperity also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Insperity grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. 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 Insperity can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Insperity may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Insperity actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Insperity's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$362.7m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$296m. So is Insperity's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Insperity that you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.