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What Does The Children's Place, Inc.'s (NASDAQ:PLCE) Balance Sheet Tell Us About It?

Simply Wall St

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While small-cap stocks, such as The Children's Place, Inc. (NASDAQ:PLCE) with its market cap of US$1.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into PLCE here.

Does PLCE Produce Much Cash Relative To Its Debt?

Over the past year, PLCE has ramped up its debt from US$47m to US$654m made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at US$66m to keep the business going. Moreover, PLCE has generated US$174m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, meaning that PLCE’s operating cash is sufficient to cover its debt.

Can PLCE pay its short-term liabilities?

Looking at PLCE’s US$600m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$474m, with a current ratio of 0.79x. The current ratio is calculated by dividing current assets by current liabilities.

NasdaqGS:PLCE Historical Debt, July 4th 2019

Does PLCE face the risk of succumbing to its debt-load?

PLCE is a relatively highly levered company with a debt-to-equity of 55%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if PLCE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PLCE, the ratio of 23.35x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although PLCE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I'm sure PLCE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Children's Place to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for PLCE’s future growth? Take a look at our free research report of analyst consensus for PLCE’s outlook.
  2. Valuation: What is PLCE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PLCE is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.