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Is VerifyMe (NASDAQ:VRME) A Risky Investment?

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. Importantly, VerifyMe, Inc. (NASDAQ:VRME) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 VerifyMe had debt of US$2.00m, up from none in one year. But on the other hand it also has US$3.85m in cash, leading to a US$1.85m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

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. On the other hand, it had cash of US$3.85m and US$2.36m worth of receivables due within a year. So it actually has 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. There's no doubt that we learn most about debt from the balance sheet. 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$5.2m, which is a gain of 968%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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. Indeed, in that time it burnt through US$3.5m of cash and made a loss of US$7.8m. Given it only has net cash of US$1.85m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that VerifyMe has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that VerifyMe is showing 3 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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