Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Verb Technology Company, Inc. (NASDAQ:VERB) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Verb Technology Company's Net Debt?
As you can see below, at the end of September 2020, Verb Technology Company had US$4.52m of debt, up from US$1.18m a year ago. Click the image for more detail. However, it does have US$10.7m in cash offsetting this, leading to net cash of US$6.20m.
How Strong Is Verb Technology Company's Balance Sheet?
We can see from the most recent balance sheet that Verb Technology Company had liabilities of US$15.5m falling due within a year, and liabilities of US$5.33m due beyond that. Offsetting this, it had US$10.7m in cash and US$1.35m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.73m.
Since publicly traded Verb Technology Company shares are worth a total of US$51.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Verb Technology Company boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Verb Technology Company can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Verb Technology Company wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to US$10m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Verb Technology Company?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Verb Technology Company 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$12m and booked a US$24m accounting loss. With only US$6.20m on the balance sheet, it would appear that its going to need to raise capital again soon. Verb Technology Company's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Verb Technology Company (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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