Gaia Inc (NASDAQ:GAIA), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is GAIA will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess GAIA’s financial health.
Does GAIA’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either GAIA does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. GAIA delivered a strikingly high revenue growth of 67.1% over the past year. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can GAIA meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Gaia has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at GAIA’s most recent US$10.4m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$45.5m, leading to a 4.38x current account ratio. Though, a ratio greater than 3x may be considered as too high, as GAIA could be holding too much capital in a low-return investment environment.
GAIA is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. I admit this is a fairly basic analysis for GAIA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Gaia to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GAIA’s future growth? Take a look at our free research report of analyst consensus for GAIA’s outlook.
- Historical Performance: What has GAIA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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