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Is The Children’s Place, Inc. (NASDAQ:PLCE) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like The Children’s Place, Inc. (NASDAQ:PLCE), with a market cap of US$1.4b. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into PLCE here.

Does PLCE produce enough cash relative to debt?

PLCE’s debt levels surged from US$56m to US$65m over the last 12 months , which is mainly comprised of near term debt. With this increase in debt, the current cash and short-term investment levels stands at US$93m , ready to deploy into the business. Moreover, PLCE has generated cash from operations of US$168m in the last twelve months, leading to an operating cash to total debt ratio of 258%, signalling that PLCE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PLCE’s case, it is able to generate 2.58x cash from its debt capital.

Does PLCE’s liquid assets cover its short-term commitments?

With current liabilities at US$412m, it appears that the company has been able to meet these commitments with a current assets level of US$547m, leading to a 1.33x current account ratio. Generally, for Specialty Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:PLCE Historical Debt January 7th 19
NasdaqGS:PLCE Historical Debt January 7th 19

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

PLCE’s level of debt is appropriate relative to its total equity, at 19%. PLCE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether PLCE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PLCE’s, case, the ratio of 79.77x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PLCE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

PLCE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure PLCE has company-specific issues impacting its capital structure decisions. You should continue to research Children’s Place to get a better picture of the stock by looking at:

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  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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.