Is Verona Pharma (NASDAQ:VRNA) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Verona Pharma

What Is Verona Pharma's Net Debt?

As you can see below, at the end of September 2024, Verona Pharma had US$120.0m of debt, up from US$19.9m a year ago. Click the image for more detail. But on the other hand it also has US$336.0m in cash, leading to a US$216.0m net cash position.

A Look At Verona Pharma's Liabilities

The latest balance sheet data shows that Verona Pharma had liabilities of US$28.0m due within a year, and liabilities of US$223.4m falling due after that. Offsetting these obligations, it had cash of US$336.0m as well as receivables valued at US$12.5m due within 12 months. So it actually has US$97.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Verona Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Verona Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Verona Pharma's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Verona Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 1,128%, to US$5.6m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Verona Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$104m and booked a US$154m accounting loss. But the saving grace is the US$216.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Verona Pharma's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Case in point: We've spotted 1 warning sign for Verona Pharma 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.