Health Check: How Prudently Does iRhythm Technologies (NASDAQ:IRTC) Use Debt?

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 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 note that iRhythm Technologies, Inc. (NASDAQ:IRTC) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for iRhythm Technologies

What Is iRhythm Technologies's Debt?

As you can see below, at the end of September 2022, iRhythm Technologies had US$34.9m of debt, up from US$24.3m a year ago. Click the image for more detail. But it also has US$203.5m in cash to offset that, meaning it has US$168.6m net cash.

How Healthy Is iRhythm Technologies' Balance Sheet?

The latest balance sheet data shows that iRhythm Technologies had liabilities of US$83.6m due within a year, and liabilities of US$117.6m falling due after that. Offsetting this, it had US$203.5m in cash and US$60.5m in receivables that were due within 12 months. So it can boast US$62.9m more liquid assets than total liabilities.

Having regard to iRhythm Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$3.18b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that iRhythm Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 iRhythm Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, iRhythm Technologies reported revenue of US$380m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is iRhythm Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months iRhythm Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$76m of cash and made a loss of US$128m. But at least it has US$168.6m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for iRhythm Technologies you should know about.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.