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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Veru Inc. (NASDAQ:VERU) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Veru's Net Debt?
As you can see below, at the end of June 2020, Veru had US$12.4m of debt, up from US$11.0m a year ago. Click the image for more detail. But on the other hand it also has US$15.4m in cash, leading to a US$3.03m net cash position.
How Strong Is Veru's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Veru had liabilities of US$17.4m due within 12 months and liabilities of US$6.54m due beyond that. Offsetting these obligations, it had cash of US$15.4m as well as receivables valued at US$4.14m due within 12 months. So it has liabilities totalling US$4.4m more than its cash and near-term receivables, combined.
Of course, Veru has a market capitalization of US$192.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Veru also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
In the last year Veru wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to US$40m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Veru?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Veru had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$2.7m and booked a US$10.2m accounting loss. With only US$3.03m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Veru may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Veru that 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.
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. 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.
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