Health Check: How Prudently Does Children's Place (NASDAQ:PLCE) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that The Children's Place, Inc. (NASDAQ:PLCE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Children's Place

What Is Children's Place's Net Debt?

The image below, which you can click on for greater detail, shows that at April 2023 Children's Place had debt of US$350.6m, up from US$299.2m in one year. On the flip side, it has US$18.2m in cash leading to net debt of about US$332.4m.

A Look At Children's Place's Liabilities

We can see from the most recent balance sheet that Children's Place had liabilities of US$719.3m falling due within a year, and liabilities of US$169.8m due beyond that. On the other hand, it had cash of US$18.2m and US$44.8m worth of receivables due within a year. So it has liabilities totalling US$826.0m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$330.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Children's Place would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Children's Place can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Children's Place had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to US$1.7b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Children's Place produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$42m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$30m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Children's Place is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.