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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that iRhythm Technologies, Inc. (NASDAQ:IRTC) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for iRhythm Technologies
What Is iRhythm Technologies's Debt?
The chart below, which you can click on for greater detail, shows that iRhythm Technologies had US$34.9m in debt in June 2023; about the same as the year before. However, it does have US$164.7m in cash offsetting this, leading to net cash of US$129.8m.
How Strong Is iRhythm Technologies' Balance Sheet?
According to the last reported balance sheet, iRhythm Technologies had liabilities of US$89.4m due within 12 months, and liabilities of US$116.2m due beyond 12 months. On the other hand, it had cash of US$164.7m and US$51.1m worth of receivables due within a year. So it actually has US$10.2m 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$2.95b 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! 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.
In the last year iRhythm Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to US$452m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is iRhythm Technologies?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that iRhythm Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$50m of cash and made a loss of US$99m. But at least it has US$129.8m 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. 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 2 warning signs for iRhythm Technologies you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.