Warren Buffett famously said, '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 can see that iRhythm Technologies, Inc. (NASDAQ:IRTC) 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does iRhythm Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that iRhythm Technologies had US$30.1m of debt in March 2021, down from US$34.9m, one year before. However, its balance sheet shows it holds US$262.3m in cash, so it actually has US$232.2m net cash.
How Strong Is iRhythm Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that iRhythm Technologies had liabilities of US$59.4m due within 12 months and liabilities of US$109.5m due beyond that. Offsetting this, it had US$262.3m in cash and US$60.0m in receivables that were due within 12 months. So it actually has US$153.4m more liquid assets than total liabilities.
This surplus suggests that iRhythm Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that iRhythm Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.
In the last year iRhythm Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$276m. With any luck the company will be able to grow its way to profitability.
So How Risky Is iRhythm Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months iRhythm Technologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$48m and booked a US$63m accounting loss. But at least it has US$232.2m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, iRhythm Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for iRhythm Technologies that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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