Health Check: How Prudently Does Verimatrix (EPA:VMX) Use Debt?

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.' 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. As with many other companies Verimatrix SA (EPA:VMX) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Verimatrix Carry?

The image below, which you can click on for greater detail, shows that Verimatrix had debt of US$25.9m at the end of December 2024, a reduction from US$32.5m over a year. However, it also had US$11.0m in cash, and so its net debt is US$14.9m.

How Healthy Is Verimatrix's Balance Sheet?

According to the last reported balance sheet, Verimatrix had liabilities of US$28.6m due within 12 months, and liabilities of US$31.8m due beyond 12 months. On the other hand, it had cash of US$11.0m and US$29.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$19.9m.

This is a mountain of leverage relative to its market capitalization of US$22.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Verimatrix 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.

Check out our latest analysis for Verimatrix

Over 12 months, Verimatrix made a loss at the EBIT level, and saw its revenue drop to US$57m, which is a fall of 7.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Verimatrix produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$5.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$3.7m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Verimatrix , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.