Here's Why Gaia (NASDAQ:GAIA) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Gaia, Inc. (NASDAQ:GAIA) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 Gaia

What Is Gaia's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Gaia had debt of US$15.8m, up from US$6.04m in one year. On the flip side, it has US$10.9m in cash leading to net debt of about US$4.91m.

How Healthy Is Gaia's Balance Sheet?

The latest balance sheet data shows that Gaia had liabilities of US$28.8m due within a year, and liabilities of US$21.5m falling due after that. Offsetting this, it had US$10.9m in cash and US$3.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$35.8m.

This is a mountain of leverage relative to its market capitalization of US$52.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to US$79m. That's not what we would hope to see.

Caveat Emptor

Importantly, Gaia had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$3.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$4.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Gaia that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.