Health Check: How Prudently Does VerifyMe (NASDAQ:VRME) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that VerifyMe, Inc. (NASDAQ:VRME) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for VerifyMe

What Is VerifyMe's Net Debt?

As you can see below, VerifyMe had US$2.10m of debt at September 2024, down from US$3.10m a year prior. But it also has US$2.61m in cash to offset that, meaning it has US$510.0k net cash.

A Look At VerifyMe's Liabilities

The latest balance sheet data shows that VerifyMe had liabilities of US$2.77m due within a year, and liabilities of US$1.78m falling due after that. Offsetting these obligations, it had cash of US$2.61m as well as receivables valued at US$1.99m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to VerifyMe's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$6.48m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, VerifyMe boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if VerifyMe 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.

Over 12 months, VerifyMe made a loss at the EBIT level, and saw its revenue drop to US$25m, which is a fall of 4.0%. We would much prefer see growth.

So How Risky Is VerifyMe?

While VerifyMe lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$677k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that VerifyMe is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.