Stock Analysis

Is Insmed (NASDAQ:INSM) Weighed On By Its Debt Load?

  •  Updated
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Insmed Incorporated (NASDAQ:INSM) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at 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 September 2020 Insmed had debt of US$351.1m, up from US$331.0m in one year. However, its balance sheet shows it holds US$588.8m in cash, so it actually has US$237.6m net cash.

NasdaqGS:INSM Debt to Equity History December 22nd 2020

How Healthy Is Insmed's Balance Sheet?

The latest balance sheet data shows that Insmed had liabilities of US$83.9m due within a year, and liabilities of US$399.8m falling due after that. Offsetting these obligations, it had cash of US$588.8m as well as receivables valued at US$15.2m due within 12 months. So it can boast US$120.3m more liquid assets than total liabilities.

This surplus suggests that Insmed has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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 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 67%, to US$169m. 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. And over the same period it saw negative free cash outflow of US$215m and booked a US$245m accounting loss. But at least it has US$237.6m 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Insmed is showing 3 warning signs in our investment analysis , you should know about...

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.

If you’re looking to trade Insmed, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

Valuation is complex, but we're helping make it simple.

Find out whether Insmed is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis