Does GAN (NASDAQ:GAN) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that GAN Limited (NASDAQ:GAN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GAN

What Is GAN's Debt?

As you can see below, at the end of March 2023, GAN had US$28.5m of debt, up from none a year ago. Click the image for more detail. However, it does have US$40.8m in cash offsetting this, leading to net cash of US$12.3m.

How Healthy Is GAN's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GAN had liabilities of US$31.0m due within 12 months and liabilities of US$41.0m due beyond that. Offsetting this, it had US$40.8m in cash and US$13.9m in receivables that were due within 12 months. So its liabilities total US$17.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since GAN has a market capitalization of US$70.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, GAN 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 GAN'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.

Over 12 months, GAN reported revenue of US$139m, which is a gain of 3.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 the fact is that over the last twelve months GAN lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$20m of cash and made a loss of US$191m. Given it only has net cash of US$12.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that GAN is showing 4 warning signs in our investment analysis , you should know about...

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.