RadNet has gotten torched over the last six months - since September 2024, its stock price has dropped 25.7% to $51.34 per share. This may have investors wondering how to approach the situation.

Is now the time to buy RadNet, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we're swiping left on RadNet for now. Here are three reasons why we avoid RDNT and a stock we'd rather own.

Why Is RadNet Not Exciting?

With over 350 imaging facilities across seven states and a growing artificial intelligence division, RadNet (NASDAQ:RDNT) operates a network of outpatient diagnostic imaging centers across the United States, offering services like MRI, CT scans, PET scans, mammography, and X-rays.

1. Fewer Distribution Channels Limit its Ceiling

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $1.83 billion in revenue over the past 12 months, RadNet is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, RadNet’s margin dropped by 10 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. RadNet’s free cash flow margin for the trailing 12 months was breakeven.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

RadNet historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.8%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

Final Judgment

RadNet’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 77.5× forward price-to-earnings (or $51.34 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d recommend looking at the most entrenched endpoint security platform on the market.

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