Health Check: How Prudently Does VerifyMe (NASDAQ:VRME) Use 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.' 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. We can see that VerifyMe, Inc. (NASDAQ:VRME) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for VerifyMe

What Is VerifyMe's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 VerifyMe had debt of US$3.10m, up from US$2.00m in one year. But on the other hand it also has US$3.11m in cash, leading to a US$5.0k net cash position.

A Look At VerifyMe's Liabilities

According to the last reported balance sheet, VerifyMe had liabilities of US$3.63m due within 12 months, and liabilities of US$3.27m due beyond 12 months. Offsetting these obligations, it had cash of US$3.11m as well as receivables valued at US$2.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.54m.

Given VerifyMe has a market capitalization of US$11.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, VerifyMe 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 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.

In the last year VerifyMe wasn't profitable at an EBIT level, but managed to grow its revenue by 160%, to US$26m. So there's no doubt that shareholders are cheering for growth

So How Risky Is VerifyMe?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year VerifyMe had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.3m of cash and made a loss of US$3.3m. But at least it has US$5.0k on the balance sheet to spend on growth, near-term. 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. 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. Case in point: We've spotted 3 warning signs for VerifyMe you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.