David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Inspire Medical Systems, Inc. (NYSE:INSP) 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?
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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Inspire Medical Systems's Debt?
As you can see below, Inspire Medical Systems had US$24.9m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$210.2m in cash, so it actually has US$185.3m net cash.
How Strong Is Inspire Medical Systems' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Inspire Medical Systems had liabilities of US$33.6m due within 12 months and liabilities of US$25.0m due beyond that. Offsetting these obligations, it had cash of US$210.2m as well as receivables valued at US$26.7m due within 12 months. So it can boast US$178.3m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Inspire Medical Systems'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.
In the last year Inspire Medical Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 109%, to US$201m. So there's no doubt that shareholders are cheering for growth
So How Risky Is Inspire Medical Systems?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Inspire Medical Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$30m of cash and made a loss of US$47m. While this does make the company a bit risky, it's important to remember it has net cash of US$185.3m. That means it could keep spending at its current rate for more than two years. Importantly, Inspire Medical Systems's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Inspire Medical Systems is showing 1 warning sign in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.