Is iRhythm Technologies (NASDAQ:IRTC) Using Debt In A Risky Way?

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. Importantly, iRhythm Technologies, Inc. (NASDAQ:IRTC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iRhythm Technologies

What Is iRhythm Technologies's Debt?

As you can see below, at the end of June 2022, iRhythm Technologies had US$34.9m of debt, up from US$27.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$204.5m in cash, so it actually has US$169.6m net cash.

How Healthy Is iRhythm Technologies' Balance Sheet?

The latest balance sheet data shows that iRhythm Technologies had liabilities of US$70.4m due within a year, and liabilities of US$120.6m falling due after that. Offsetting this, it had US$204.5m in cash and US$57.4m in receivables that were due within 12 months. So it actually has US$70.8m more liquid assets than total liabilities.

This state of affairs indicates that iRhythm Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$4.68b company is struggling for cash, we still think it's worth monitoring its 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, iRhythm Technologies reported revenue of US$362m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is iRhythm Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year iRhythm Technologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$69m of cash and made a loss of US$131m. However, it has net cash of US$169.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for iRhythm Technologies that 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.

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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.