Health Check: How Careful Is VerifyMe (NASDAQ:VRME) Using Debt?

Warren Buffett famously said, “Volatility is far from synonymous with risk.” It’s only natural to consider a company’s balance sheet when considering how risky it is, since there is often debt associated with a company’s collapse. We can see that VerifyMe, Inc. (NASDAQ:VRME) uses debt in its business. But should shareholders be concerned about the use of debt?

When is debt a problem?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still costly) case is where a company has to issue shares at bargain prices, resulting in permanent shareholder dilution, just to shore up its balance sheet. However, as a replacement for dilution, debt can be an extremely good tool for companies that need capital to invest in growth at high returns. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for VerifyMe

How much is VerifyMe’s net debt?

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

A look at VerifyMe’s liabilities

The latest balance sheet data shows that VerifyMe had liabilities of US$2.77m within a year, and liabilities of US$1.78m falling due after that. Offsetting these obligations, the company had cash of US$2.61m as well as receivables valued at US$1.99m due within 12 months. The company’s total liabilities therefore almost perfectly match its short-term, liquid assets.

Considering VerifyMe’s size, the company’s cash and total liabilities appear to be in balance. While it’s hard to imagine the US$6.48m company struggling for liquidity, we still think its balance sheet is worth keeping an eye on. In short, VerifyMe has net cash, so it’s fair to say it doesn’t have a huge debt load! There is no doubt that the balance sheet is where we learn the most about debt. Ultimately, however, the company’s future profitability will determine whether 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 reported a loss at the EBIT level and saw revenue fall to $25 million, a decline of 4.0%. We would much rather see growth.

How risky is VerifyMe?

While VerifyMe lost money at the earnings before interest and tax (EBIT) level, it actually generated positive free cash flow of $677,000. So even though it is loss-making, it doesn’t seem to have too much balance sheet risk in the near term if you keep an eye on net cash. Given the mediocre sales growth last year, we don’t think the investment opportunity is particularly attractive. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – quite the opposite. Notice that VerifyMe appears 4 warning signs in our investment analysis and one of them is a bit unpleasant…

Ultimately, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of growing profits). It’s free.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.