Stock Analysis

Is Insmed (NASDAQ:INSM) Using Too Much Debt?

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NasdaqGS:INSM
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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 can see that Insmed Incorporated (NASDAQ:INSM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Insmed

What Is Insmed's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Insmed had debt of US$548.7m, up from US$346.0m in one year. However, it does have US$928.3m in cash offsetting this, leading to net cash of US$379.6m.

debt-equity-history-analysis
NasdaqGS:INSM Debt to Equity History September 10th 2021

A Look At Insmed's Liabilities

Zooming in on the latest balance sheet data, we can see that Insmed had liabilities of US$99.7m due within 12 months and liabilities of US$599.1m due beyond that. Offsetting this, it had US$928.3m in cash and US$18.4m in receivables that were due within 12 months. So it can boast US$248.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Insmed could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Insmed has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Insmed reported revenue of US$171m, which is a gain of 4.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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 in the last year Insmed had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$336m and booked a US$375m accounting loss. But at least it has US$379.6m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Insmed that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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