Is dentalcorp Holdings (TSE:DNTL) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 dentalcorp Holdings Ltd. (TSE:DNTL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for dentalcorp Holdings

What Is dentalcorp Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that dentalcorp Holdings had CA$1.05b in debt in June 2024; about the same as the year before. However, it also had CA$72.3m in cash, and so its net debt is CA$974.3m.

A Look At dentalcorp Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that dentalcorp Holdings had liabilities of CA$192.3m due within 12 months and liabilities of CA$1.40b due beyond that. Offsetting this, it had CA$72.3m in cash and CA$86.2m in receivables that were due within 12 months. So its liabilities total CA$1.44b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$1.81b, so it does suggest shareholders should keep an eye on dentalcorp Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.39 times and a disturbingly high net debt to EBITDA ratio of 5.0 hit our confidence in dentalcorp Holdings like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. The silver lining is that dentalcorp Holdings grew its EBIT by 166% last year, which nourishing like the idealism of youth. If that earnings trend continues it will make its debt load much more manageable in the future. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine dentalcorp Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, dentalcorp Holdings actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

dentalcorp Holdings's interest cover was a real negative on this analysis, as was its net debt to EBITDA. But its conversion of EBIT to free cash flow was significantly redeeming. It's also worth noting that dentalcorp Holdings is in the Healthcare industry, which is often considered to be quite defensive. Considering this range of data points, we think dentalcorp Holdings is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for dentalcorp Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.