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. As with many other companies Inspire Medical Systems, Inc. (NYSE:INSP) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Inspire Medical Systems’s Net Debt?
The chart below, which you can click on for greater detail, shows that Inspire Medical Systems had US$24.7m in debt in March 2021; about the same as the year before. But on the other hand it also has US$226.1m in cash, leading to a US$201.4m net cash position.
How Healthy Is Inspire Medical Systems’ Balance Sheet?
We can see from the most recent balance sheet that Inspire Medical Systems had liabilities of US$19.4m falling due within a year, and liabilities of US$30.9m due beyond that. Offsetting this, it had US$226.1m in cash and US$21.6m in receivables that were due within 12 months. So it can boast US$197.5m more liquid assets than total liabilities.
This short term liquidity is a sign that Inspire Medical Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Inspire Medical Systems 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 ultimately the future profitability of the business will decide if Inspire Medical Systems can strengthen its balance sheet over time.
In the last year Inspire Medical Systems wasn’t profitable at an EBIT level, but managed to grow its revenue by 54%, to US$134m. Shareholders probably have their fingers crossed that it can grow its way to profits.
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$52m of cash and made a loss of US$57m. But the saving grace is the US$201.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Inspire Medical Systems’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet.