Here's Why VerifyMe (NASDAQ:VRME) Can Manage Its Debt Despite Losing Money

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.' 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. Importantly, VerifyMe, Inc. (NASDAQ:VRME) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for VerifyMe

How Much Debt Does VerifyMe Carry?

As you can see below, at the end of June 2022, VerifyMe had US$2.00m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$3.85m in cash, leading to a US$1.85m net cash position.

How Strong Is VerifyMe's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that VerifyMe had liabilities of US$2.59m due within 12 months and liabilities of US$1.92m due beyond that. Offsetting these obligations, it had cash of US$3.85m as well as receivables valued at US$2.36m due within 12 months. So it can boast US$1.70m more liquid assets than total liabilities.

This short term liquidity is a sign that VerifyMe could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that VerifyMe 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 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 968%, to US$5.2m. That's virtually the hole-in-one of revenue growth!

So How Risky Is VerifyMe?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that VerifyMe 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$4.3m and booked a US$7.8m accounting loss. With only US$1.85m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, VerifyMe's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 4 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.