Is Verastem (NASDAQ:VSTM) Using Too Much Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Verastem, Inc. (NASDAQ:VSTM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
View our latest analysis for Verastem
What Is Verastem's Net Debt?
As you can see below, at the end of March 2022, Verastem had US$24.4m of debt, up from US$19.7m a year ago. Click the image for more detail. But on the other hand it also has US$106.3m in cash, leading to a US$81.9m net cash position.
How Strong Is Verastem's Balance Sheet?
According to the last reported balance sheet, Verastem had liabilities of US$16.9m due within 12 months, and liabilities of US$26.5m due beyond 12 months. Offsetting these obligations, it had cash of US$106.3m as well as receivables valued at US$2.85m due within 12 months. So it actually has US$65.8m more liquid assets than total liabilities.
This surplus liquidity suggests that Verastem's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Verastem boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Verastem's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Verastem had a loss before interest and tax, and actually shrunk its revenue by 85%, to US$2.2m. To be frank that doesn't bode well.
So How Risky Is Verastem?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Verastem lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$53m and booked a US$73m accounting loss. But at least it has US$81.9m on the balance sheet to spend on growth, near-term. 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 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. For example - Verastem has 5 warning signs we think you should be aware of.
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.
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