First Advantage has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 13.8% to $15.96 per share while the index has gained 11.3%.

Is there a buying opportunity in First Advantage, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is First Advantage Not Exciting?

We're swiping left on First Advantage for now. Here are three reasons why FA doesn't excite us and a stock we'd rather own.

1. EPS Trending Down

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

First Advantage’s full-year EPS dropped 30.6%, or 9.3% annually, over the last three years. We’ll keep a close eye on the company as diminishing earnings could imply changing secular trends and preferences.

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, First Advantage’s margin dropped by 16.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. First Advantage’s free cash flow margin for the trailing 12 months was negative 2.2%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

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.

First Advantage burned through $27.66 million of cash over the last year, and its $2.13 billion of debt exceeds the $184.3 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the First Advantage’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of First Advantage until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

First Advantage’s business quality ultimately falls short of our standards. That said, the stock currently trades at 15.4× forward P/E (or $15.96 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

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