Is Insmed (NASDAQ:INSM) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Insmed Incorporated (NASDAQ:INSM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Insmed

What Is Insmed's Net Debt?

The chart below, which you can click on for greater detail, shows that Insmed had US$1.33b in debt in June 2024; about the same as the year before. However, it also had US$1.25b in cash, and so its net debt is US$82.9m.

A Look At Insmed's Liabilities

The latest balance sheet data shows that Insmed had liabilities of US$524.2m due within a year, and liabilities of US$1.25b falling due after that. Offsetting this, it had US$1.25b in cash and US$40.3m in receivables that were due within 12 months. So its liabilities total US$484.2m more than the combination of its cash and short-term receivables.

Of course, Insmed has a titanic market capitalization of US$12.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, Insmed has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. 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 22%, to US$329m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Insmed's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$644m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$591m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Insmed (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.