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Is GAN (NASDAQ:GAN) Weighed On By Its Debt Load?

·4 min read

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies GAN Limited (NASDAQ:GAN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for GAN

What Is GAN's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 GAN had debt of US$27.7m, up from none in one year. However, it does have US$49.1m in cash offsetting this, leading to net cash of US$21.4m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is GAN's Balance Sheet?

We can see from the most recent balance sheet that GAN had liabilities of US$27.4m falling due within a year, and liabilities of US$49.6m due beyond that. On the other hand, it had cash of US$49.1m and US$11.2m worth of receivables due within a year. So its liabilities total US$16.7m more than the combination of its cash and short-term receivables.

Of course, GAN has a market capitalization of US$119.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, GAN 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 GAN can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year GAN wasn't profitable at an EBIT level, but managed to grow its revenue by 68%, to US$135m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is GAN?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year GAN had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$27m and booked a US$64m accounting loss. With only US$21.4m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, GAN may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with GAN .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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

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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