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The G8 share price is tumbling again today

Tom Richardson
child care shares

The G8 Education Ltd (ASX: GEM) is backing up a 16% plunge yesterday with a fall of another 6% today to a 52-week low of $1.98. 

The childcare centre roll up has cratered since it warned investors yesterday that occupancy growth over calendar 2019 will only be around 1%.

Occupancy rates as a metric for childcare centre businesses are directly related to revenue and critical to profit margins.

This is similar to conceptually to flight loads or passenger numbers for an airline like Qantas Airways Limited (ASX: QAN) as fixed costs are relatively high and operating leverage works both ways.

For example Qantas cannot cut the number of pilots if it doesn’t sell many flight tickets, while G8 cannot reduce its rent or cut already minimal staff wages if occupancy is not high enough. 

Another problem G8 has flagged is oversupply in the childcare market that is also probably limiting its ability to lift prices in response to the soft occupancy rates. 

As a result of its admissions G8 now expects EBIT between $131 million to $134 million over calendar 2019.

It has also accrued a lot of bank debt and via the issue of corporate notes. The balance sheet leverage alone would put me off buying shares in a business like G8 Education.

The post The G8 share price is tumbling again today appeared first on Motley Fool Australia.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019