Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Gaia, Inc. (NASDAQ:GAIA) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Gaia Carry?
As you can see below, at the end of March 2019, Gaia had US$12.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$22.3m in cash, so it actually has US$9.80m net cash.
How Strong Is Gaia's Balance Sheet?
The latest balance sheet data shows that Gaia had liabilities of US$13.8m due within a year, and liabilities of US$12.7m falling due after that. Offsetting this, it had US$22.3m in cash and US$1.91m in receivables that were due within 12 months. So it has liabilities totalling US$2.23m more than its cash and near-term receivables, combined.
Given Gaia has a market capitalization of US$103.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gaia 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 ultimately the future profitability of the business will decide if Gaia 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, Gaia reported revenue of US$47m, which is a gain of 49%. With any luck the company will be able to grow its way to profitability.
So How Risky Is Gaia?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Gaia had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$41m of cash and made a loss of US$34m. With only US$22m on the balance sheet, it would appear that its going to need to raise capital again soon. Gaia's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 Gaia insider transactions.
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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