Health Check: How Prudently Does Gaia (NASDAQ:GAIA) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Gaia, Inc. (NASDAQ:GAIA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Gaia

What Is Gaia's Net Debt?

As you can see below, Gaia had US$6.39m of debt at December 2020, down from US$18.4m a year prior. But on the other hand it also has US$12.6m in cash, leading to a US$6.22m net cash position.

A Look At Gaia's Liabilities

According to the last reported balance sheet, Gaia had liabilities of US$21.3m due within 12 months, and liabilities of US$14.5m due beyond 12 months. On the other hand, it had cash of US$12.6m and US$2.02m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$21.2m.

Since publicly traded Gaia shares are worth a total of US$253.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

In the last year Gaia wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$67m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Gaia?

While Gaia lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$519k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for Gaia shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Gaia that you should be aware of.

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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