Is Insmed (NASDAQ:INSM) Using Debt Sensibly?

Warren Buffett famously said, '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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Insmed

What Is Insmed's Net Debt?

The image below, which you can click on for greater detail, shows that Insmed had debt of US$1.11b at the end of September 2024, a reduction from US$1.30b over a year. But it also has US$1.47b in cash to offset that, meaning it has US$353.0m net cash.

How Strong Is Insmed's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Insmed had liabilities of US$259.2m due within 12 months and liabilities of US$1.31b due beyond that. Offsetting this, it had US$1.47b in cash and US$42.3m in receivables that were due within 12 months. So its liabilities total US$59.3m more than the combination of its cash and short-term receivables.

Having regard to Insmed's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$13.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, 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 it is future earnings, more than anything, that will determine Insmed'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 Insmed wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$343m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Insmed?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Insmed had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$636m of cash and made a loss of US$864m. But at least it has US$353.0m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Insmed may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Insmed is showing 3 warning signs in our investment analysis , you should know about...

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.