Does VerifyMe (NASDAQ:VRME) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that VerifyMe, Inc. (NASDAQ:VRME) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for VerifyMe

How Much Debt Does VerifyMe Carry?

As you can see below, at the end of March 2023, VerifyMe had US$2.25m of debt, up from none a year ago. Click the image for more detail. But it also has US$3.09m in cash to offset that, meaning it has US$831.0k net cash.

How Healthy Is VerifyMe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VerifyMe had liabilities of US$3.81m due within 12 months and liabilities of US$2.64m due beyond that. Offsetting this, it had US$3.09m in cash and US$2.40m in receivables that were due within 12 months. So it has liabilities totalling US$964.0k more than its cash and near-term receivables, combined.

Since publicly traded VerifyMe shares are worth a total of US$10.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, VerifyMe also has more cash than debt, so we're pretty confident 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 VerifyMe'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.

Over 12 months, VerifyMe reported revenue of US$25m, which is a gain of 2,885%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is VerifyMe?

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 VerifyMe lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.2m and booked a US$15m accounting loss. Given it only has net cash of US$831.0k, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, VerifyMe'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. We've identified 4 warning signs with VerifyMe , and understanding them should be part of your investment process.

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.