David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Verrica Pharmaceuticals Inc. (NASDAQ:VRCA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does Verrica Pharmaceuticals Carry?

As you can see below, at the end of March 2024, Verrica Pharmaceuticals had US$42.8m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$48.9m in cash, so it actually has US$6.09m net cash.

How Healthy Is Verrica Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Verrica Pharmaceuticals had liabilities of US$19.4m due within a year, and liabilities of US$45.4m falling due after that. Offsetting these obligations, it had cash of US$48.9m as well as receivables valued at US$7.59m due within 12 months. So its liabilities total US$8.27m more than the combination of its cash and short-term receivables.

Since publicly traded Verrica Pharmaceuticals shares are worth a total of US$315.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Verrica Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Verrica Pharmaceuticals'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 Verrica Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to US$8.9m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Verrica Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Verrica Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$54m of cash and made a loss of US$81m. Given it only has net cash of US$6.09m, the company may need to raise more capital if it doesn't reach break-even soon. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Verrica Pharmaceuticals you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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