Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 iRhythm Technologies, Inc. (NASDAQ:IRTC) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

Check out our latest analysis for iRhythm Technologies

What Is iRhythm Technologies's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 iRhythm Technologies had debt of US$34.9m, up from US$27.2m in one year. But on the other hand it also has US$204.5m in cash, leading to a US$169.6m net cash position.

How Healthy Is iRhythm Technologies' Balance Sheet?

We can see from the most recent balance sheet that iRhythm Technologies had liabilities of US$70.4m falling due within a year, and liabilities of US$120.6m due beyond that. On the other hand, it had cash of US$204.5m and US$57.4m worth of receivables due within a year. So it can boast US$70.8m 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 while it's hard to imagine that the US$3.69b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, iRhythm Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine iRhythm Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year iRhythm Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$362m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is iRhythm Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for iRhythm Technologies 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.