David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Veru Inc. (NASDAQ:VERU) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Veru's Debt?
As you can see below, Veru had US$11.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$8.04m, its net debt is less, at about US$2.94m.
How Strong Is Veru's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Veru had liabilities of US$11.7m due within 12 months and liabilities of US$7.44m due beyond that. Offsetting this, it had US$8.04m in cash and US$4.77m in receivables that were due within 12 months. So its liabilities total US$6.30m more than the combination of its cash and short-term receivables.
Given Veru has a market capitalization of US$124.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Veru'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.
Over 12 months, Veru reported revenue of US$28m, which is a gain of 97%. Shareholders probably have their fingers crossed that it can grow its way to profits.
While we can certainly savour Veru's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. To be specific the EBIT loss came in at US$8.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$7.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Veru I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.