This morning G8 Education Ltd [ASX:GEM], a listed early childcare provider, climbed 3.2% to $3.89 per share.
What happened to G8 Education Share Price?
G8 Education announced the acquisition of 19 early education and childcare centres. It paid $27 million for them, which was 3.75-times earnings before interest and tax (EBIT). The 19 centres include six in Queensland, five in NSW and eight in Victoria.
Subject to condition, the acquisition is expected to be settled before the end of October 2017. Managing director of GEM, Gray Carroll said:
‘The acquisition represents a positive opportunity for the group to grow its portfolio by acquiring high quality operating centres in complementary locations at an attractive multiple.’
The centres are expected to contribute around $1 million to EBIT for FY17.
What now for G8 Education?
GEM is a fast growing company. Take a look at their sales and profit growth from 2013–16.
Source: The Wall Street Journal
While net profits have slipped slightly in 2016, it would seem GEM has a proven model which can grow as they expand their centres. There is one problem though — GEM has limited assets, and a whole lot of debt.
Around 86% of total assets in FY16 came from intangible assets, or goodwill. This represent the price GEM has overpaid for their acquisitions (the price exceeding net tangible assets). GEM also has a lot of debt which its needs to service.
The company has a debt to equity ratio of 87.5%, far from conservative. So while GEM may continue to grow into the future, at some point they’ll have to slow down and repay their debt-fuelled acquisitions.
Junior Analyst, Money Morning
PS: if you wanted to find more growth stocks like GEM but uncomfortable with high levels of debt, check out these three top small-cap stocks trading on the ASX right now.