Does Inspire Medical Systems (NYSE:INSP) Have A Healthy Balance Sheet?

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.' 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, Inspire Medical Systems, Inc. (NYSE:INSP) 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. 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.

View our latest analysis for Inspire Medical Systems

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$24.6m in debt in June 2020; about the same as the year before. But on the other hand it also has US$242.6m in cash, leading to a US$217.9m net cash position.

How Healthy Is Inspire Medical Systems's Balance Sheet?

According to the last reported balance sheet, Inspire Medical Systems had liabilities of US$13.0m due within 12 months, and liabilities of US$24.7m due beyond 12 months. Offsetting this, it had US$242.6m in cash and US$10.2m in receivables that were due within 12 months. So it actually has US$215.1m 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! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Inspire Medical Systems 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 Inspire Medical Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to US$81m. 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 in the last year Inspire Medical Systems had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$51.2m of cash and made a loss of US$56.7m. But the saving grace is the US$217.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. Pre-profit companies are often risky, but they can also offer great 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. Case in point: We've spotted 3 warning signs for Inspire Medical Systems you should be aware of.

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.

This article by Simply Wall St is general in nature. 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.

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