Is Verona Pharma (NASDAQ:VRNA) Using Too Much Debt?

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.' 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. As with many other companies Verona Pharma plc (NASDAQ:VRNA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Verona Pharma

What Is Verona Pharma's Debt?

As you can see below, at the end of December 2023, Verona Pharma had US$48.4m of debt, up from US$9.77m a year ago. Click the image for more detail. But on the other hand it also has US$271.8m in cash, leading to a US$223.4m net cash position.

How Healthy Is Verona Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Verona Pharma had liabilities of US$8.69m due within 12 months and liabilities of US$50.1m due beyond that. On the other hand, it had cash of US$271.8m and US$11.0m worth of receivables due within a year. So it can boast US$223.9m more liquid assets than total liabilities.

It's good to see that Verona Pharma has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Verona Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

It seems likely shareholders hope that Verona Pharma can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Verona Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Verona Pharma 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$50m and booked a US$54m accounting loss. But the saving grace is the US$223.4m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Verona Pharma , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.