iRhythm has been on fire lately. In the past six months alone, the company’s stock price has rocketed 68.9%, reaching $150.02 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy iRhythm, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is iRhythm Not Exciting?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why you should be careful with IRTC and a stock we'd rather own.

1. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

iRhythm’s earnings losses deepened over the last five years as its EPS dropped 5.6% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, iRhythm’s low margin of safety could leave its stock price susceptible to large downswings.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

iRhythm’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 11.9%. This means it lit $11.87 of cash on fire for every $100 in revenue.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

iRhythm’s $735.5 million of debt exceeds the $520.6 million of cash on its balance sheet. Furthermore, its 124× net-debt-to-EBITDA ratio (based on its EBITDA of $1.74 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. iRhythm could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope iRhythm can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

iRhythm’s business quality ultimately falls short of our standards. Following the recent rally, the stock trades at 85.2× forward EV-to-EBITDA (or $150.02 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.

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