Is Verona Pharma (NASDAQ:VRNA) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Verona Pharma plc (NASDAQ:VRNA) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Verona Pharma's Debt?

As you can see below, at the end of December 2024, Verona Pharma had US$226.4m of debt, up from US$48.4m a year ago. Click the image for more detail. However, it does have US$399.8m in cash offsetting this, leading to net cash of US$173.3m.

How Healthy Is Verona Pharma's Balance Sheet?

According to the last reported balance sheet, Verona Pharma had liabilities of US$42.7m due within 12 months, and liabilities of US$227.0m due beyond 12 months. Offsetting this, it had US$399.8m in cash and US$37.3m in receivables that were due within 12 months. So it can boast US$167.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Verona Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Verona Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Verona Pharma'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 .

Check out our latest analysis for Verona Pharma

While it hasn't made a profit, at least Verona Pharma booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Verona Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Verona Pharma 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$123m and booked a US$173m accounting loss. But the saving grace is the US$173.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Verona Pharma insider transactions .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.