DeepVerge (LON:DVRG) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, DeepVerge plc (LON:DVRG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for DeepVerge

What Is DeepVerge's Net Debt?

As you can see below, at the end of June 2022, DeepVerge had UK£4.24m of debt, up from UK£1.21m a year ago. Click the image for more detail. However, it does have UK£1.18m in cash offsetting this, leading to net debt of about UK£3.06m.

How Healthy Is DeepVerge's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DeepVerge had liabilities of UK£8.24m due within 12 months and liabilities of UK£3.91m due beyond that. Offsetting this, it had UK£1.18m in cash and UK£7.04m in receivables that were due within 12 months. So its liabilities total UK£3.93m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because DeepVerge is worth UK£19.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is DeepVerge's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year DeepVerge wasn't profitable at an EBIT level, but managed to grow its revenue by 83%, to UK£12m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, DeepVerge still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£3.0m. 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. 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 UK£7.8m of cash over the last year. So in short it's a really risky stock. 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 example, we've discovered 4 warning signs for DeepVerge (1 is significant!) that you should be aware of before investing here.

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.

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