Is Veru (NASDAQ:VERU) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Veru Inc. (NASDAQ:VERU) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Veru

What Is Veru's Debt?

The chart below, which you can click on for greater detail, shows that Veru had US$9.88m in debt in September 2024; about the same as the year before. However, it does have US$24.9m in cash offsetting this, leading to net cash of US$15.0m.

How Strong Is Veru's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Veru had liabilities of US$11.9m due within 12 months and liabilities of US$16.2m due beyond that. Offsetting these obligations, it had cash of US$24.9m as well as receivables valued at US$3.96m due within 12 months. So it actually has US$774.5k more liquid assets than total liabilities.

This state of affairs indicates that Veru's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$115.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Veru has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Veru 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.

Over 12 months, Veru reported revenue of US$17m, which is a gain of 3.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Veru?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Veru lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$22m and booked a US$38m accounting loss. However, it has net cash of US$15.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs with Veru (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.