Stock Analysis

Is Insulet (NASDAQ:PODD) Using Too Much Debt?

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NasdaqGS:PODD
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Insulet Corporation (NASDAQ:PODD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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.

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How Much Debt Does Insulet Carry?

The image below, which you can click on for greater detail, shows that Insulet had debt of US$907.1m at the end of September 2020, a reduction from US$985.8m over a year. On the flip side, it has US$896.7m in cash leading to net debt of about US$10.4m.

debt-equity-history-analysis
NasdaqGS:PODD Debt to Equity History January 22nd 2021

How Healthy Is Insulet's Balance Sheet?

The latest balance sheet data shows that Insulet had liabilities of US$175.2m due within a year, and liabilities of US$940.4m falling due after that. Offsetting this, it had US$896.7m in cash and US$85.4m in receivables that were due within 12 months. So it has liabilities totalling US$133.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that Insulet's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$19.2b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Insulet has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Insulet has a net debt to EBITDA ratio of 0.09, suggesting a very conservative balance sheet. But EBIT was only 1.8 times the interest expense last year, which shows that the debt has negatively impacted the business, by constraining its options (and restricting its free cash flow). Also relevant is that Insulet has grown its EBIT by a very respectable 27% in the last year, thus enhancing its ability to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Insulet's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Insulet saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Insulet's conversion of EBIT to free cash flow was a real negative on this analysis, as was its interest cover. But its net debt to EBITDA was significantly redeeming. It's also worth noting that Insulet is in the Medical Equipment industry, which is often considered to be quite defensive. When we consider all the elements mentioned above, it seems to us that Insulet is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Be aware that Insulet is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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What are the risks and opportunities for Insulet?

Insulet Corporation develops, manufactures, and sells insulin delivery systems for people with insulin-dependent diabetes.

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Rewards

  • Earnings are forecast to grow 50.65% per year

  • Became profitable this year

Risks

  • Interest payments are not well covered by earnings

  • Significant insider selling over the past 3 months

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