Is Verrica Pharmaceuticals (NASDAQ:VRCA) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Verrica Pharmaceuticals

How Much Debt Does Verrica Pharmaceuticals Carry?

As you can see below, at the end of September 2023, Verrica Pharmaceuticals had US$42.4m of debt, up from none a year ago. Click the image for more detail. However, it does have US$84.3m in cash offsetting this, leading to net cash of US$41.9m.

A Look At Verrica Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Verrica Pharmaceuticals had liabilities of US$11.4m falling due within a year, and liabilities of US$43.5m due beyond that. Offsetting these obligations, it had cash of US$84.3m as well as receivables valued at US$4.07m due within 12 months. So it actually has US$33.5m more liquid assets than total liabilities.

This surplus suggests that Verrica Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Verrica Pharmaceuticals 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 it is future earnings, more than anything, that will determine Verrica Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Verrica Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 64%, to US$3.2m. To be frank that doesn't bode well.

So How Risky Is Verrica Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Verrica Pharmaceuticals 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$29m and booked a US$48m accounting loss. But the saving grace is the US$41.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Verrica Pharmaceuticals (of which 1 is a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.