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

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 Verona Pharma plc (NASDAQ:VRNA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out 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 2024 Verona Pharma had US$48.5m of debt, an increase on US$19.9m, over one year. But it also has US$254.9m in cash to offset that, meaning it has US$206.3m net cash.

How Strong Is Verona Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Verona Pharma had liabilities of US$14.8m due within 12 months and liabilities of US$50.2m due beyond that. Offsetting this, it had US$254.9m in cash and US$11.5m in receivables that were due within 12 months. So it can boast US$201.4m more liquid assets than total liabilities.

This surplus suggests that Verona Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 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.

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 the fact is that over the last twelve months Verona Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$58m and booked a US$125m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$206.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Verona Pharma has 2 warning signs (and 1 which doesn't sit too well with us) we think 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.