Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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$24.9m in debt in June 2021; about the same as the year before. But it also has US$207.8m in cash to offset that, meaning it has US$183.0m net cash.

How Strong Is Inspire Medical Systems’ Balance Sheet?

According to the last reported balance sheet, Inspire Medical Systems had liabilities of US$24.4m due within 12 months, and liabilities of US$27.9m due beyond 12 months. Offsetting this, it had US$207.8m in cash and US$24.9m in receivables that were due within 12 months. So it can boast US$180.5m 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. Succinctly put, Inspire Medical Systems 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 Inspire Medical Systems’s ability to maintain a healthy balance sheet going forward.

In the last year Inspire Medical Systems wasn’t profitable at an EBIT level, but managed to grow its revenue by 115%, to US$175m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Inspire Medical Systems?

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 Inspire Medical Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$38m of cash and made a loss of US$47m. While this does make the company a bit risky, it’s important to remember it has net cash of US$183.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Inspire Medical Systems has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years.