Is GAN (NASDAQ:GAN) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 GAN Limited (NASDAQ:GAN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GAN

How Much Debt Does GAN Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 GAN had US$28.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$49.1m in cash, so it actually has US$21.0m net cash.

A Look At GAN's Liabilities

Zooming in on the latest balance sheet data, we can see that GAN had liabilities of US$27.4m due within 12 months and liabilities of US$49.6m due beyond that. Offsetting this, it had US$49.1m in cash and US$11.2m in receivables that were due within 12 months. So its liabilities total US$16.7m more than the combination of its cash and short-term receivables.

GAN has a market capitalization of US$61.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, GAN also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, GAN reported revenue of US$135m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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 we do note that GAN had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$27m and booked a US$62m accounting loss. Given it only has net cash of US$21.0m, the company may need to raise more capital if it doesn't reach break-even soon. GAN'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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for GAN that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.