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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) makes use of debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Verrica Pharmaceuticals

What Is Verrica Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Verrica Pharmaceuticals had debt of US$42.8m, up from none in one year. But it also has US$48.9m in cash to offset that, meaning it has US$6.09m net cash.

A Look At Verrica Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Verrica Pharmaceuticals had liabilities of US$19.4m falling due within a year, and liabilities of US$45.4m due beyond that. Offsetting this, it had US$48.9m in cash and US$7.59m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.27m.

Of course, Verrica Pharmaceuticals has a market capitalization of US$298.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Verrica Pharmaceuticals 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to US$8.9m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Verrica Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Verrica Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$54m and booked a US$81m accounting loss. With only US$6.09m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Verrica Pharmaceuticals .

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.

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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.

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