Does Verona Pharma (NASDAQ:VRNA) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We can see that Verona Pharma plc (NASDAQ:VRNA) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Verona Pharma

What Is Verona Pharma's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Verona Pharma had US$19.8m of debt, an increase on US$4.93m, over one year. However, its balance sheet shows it holds US$291.4m in cash, so it actually has US$271.6m net cash.

How Strong Is Verona Pharma's Balance Sheet?

According to the last reported balance sheet, Verona Pharma had liabilities of US$26.5m due within 12 months, and liabilities of US$19.9m due beyond 12 months. On the other hand, it had cash of US$291.4m and US$11.8m worth of receivables due within a year. So it can boast US$256.9m more liquid assets than total liabilities.

This surplus suggests that Verona Pharma is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Verona Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Verona Pharma can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given it has no significant operating revenue at the moment, shareholders will be hoping Verona Pharma can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Verona Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Verona Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$51m of cash and made a loss of US$61m. Given it only has net cash of US$271.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 2 warning signs for Verona Pharma (1 is potentially serious) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.