Does MindChamps PreSchool (SGX:CNE) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies MindChamps PreSchool Limited (SGX:CNE) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MindChamps PreSchool

What Is MindChamps PreSchool's Net Debt?

The image below, which you can click on for greater detail, shows that MindChamps PreSchool had debt of S$38.0m at the end of June 2020, a reduction from S$44.1m over a year. However, it also had S$5.83m in cash, and so its net debt is S$32.1m.

How Healthy Is MindChamps PreSchool's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MindChamps PreSchool had liabilities of S$35.4m due within 12 months and liabilities of S$51.2m due beyond that. Offsetting these obligations, it had cash of S$5.83m as well as receivables valued at S$18.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$62.0m.

This deficit is considerable relative to its market capitalization of S$72.5m, so it does suggest shareholders should keep an eye on MindChamps PreSchool's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MindChamps PreSchool's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year MindChamps PreSchool wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to S$53m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months MindChamps PreSchool produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at S$5.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of S$5.5m and the profit of S$6.9m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that MindChamps PreSchool is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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