Is Insperity (NYSE:NSP) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Insperity, Inc. (NYSE:NSP) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Insperity

What Is Insperity's Net Debt?

As you can see below, Insperity had US$352.9m of debt at March 2021, down from US$369.4m a year prior. However, it does have US$529.1m in cash offsetting this, leading to net cash of US$176.2m.

A Look At Insperity's Liabilities

The latest balance sheet data shows that Insperity had liabilities of US$1.04b due within a year, and liabilities of US$651.1m falling due after that. Offsetting this, it had US$529.1m in cash and US$564.7m in receivables that were due within 12 months. So it has liabilities totalling US$601.7m more than its cash and near-term receivables, combined.

Since publicly traded Insperity shares are worth a total of US$3.60b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Insperity boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Insperity has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. 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 Insperity 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Insperity may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Insperity generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Insperity does have more liabilities than liquid assets, it also has net cash of US$176.2m. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in US$230m. So is Insperity's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Insperity , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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