Veru (NASDAQ:VERU) Has Debt But No Earnings; Should You Worry?

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 should shareholders be worried about its use of debt?

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. 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. 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.

See our latest analysis for Veru

What Is Veru's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Veru had US$10.8m of debt in September 2022, down from US$12.6m, one year before. However, its balance sheet shows it holds US$80.2m in cash, so it actually has US$69.4m net cash.

How Strong Is Veru's Balance Sheet?

According to the last reported balance sheet, Veru had liabilities of US$41.4m due within 12 months, and liabilities of US$13.8m due beyond 12 months. Offsetting these obligations, it had cash of US$80.2m as well as receivables valued at US$3.55m due within 12 months. So it actually has US$28.5m more liquid assets than total liabilities.

This surplus suggests that Veru has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Veru boasts net cash, so it's fair to say it does not have a heavy debt load! 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 made a loss at the EBIT level, and saw its revenue drop to US$39m, which is a fall of 36%. To be frank that doesn't bode well.

So How Risky Is Veru?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Veru lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$48m of cash and made a loss of US$84m. With only US$69.4m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Veru (2 make us uncomfortable) you should be aware of.

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.