Is VerifyMe (NASDAQ:VRME) Using Debt In A Risky Way?

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 is this debt a concern to shareholders?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for VerifyMe

What Is VerifyMe's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 VerifyMe had debt of US$2.35m, up from US$2.25m in one year. But on the other hand it also has US$2.82m in cash, leading to a US$468.0k net cash position.

How Healthy Is VerifyMe's Balance Sheet?

The latest balance sheet data shows that VerifyMe had liabilities of US$2.79m due within a year, and liabilities of US$2.71m falling due after that. On the other hand, it had cash of US$2.82m and US$2.11m worth of receivables due within a year. So its liabilities total US$571.0k more than the combination of its cash and short-term receivables.

Since publicly traded VerifyMe shares are worth a total of US$16.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 ultimately the future profitability of the business will decide if VerifyMe can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, VerifyMe saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

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$530k of cash and made a loss of US$2.4m. But the saving grace is the US$468.0k on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.