Does Q & M Dental Group (Singapore) (SGX:QC7) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Q & M Dental Group (Singapore) Limited (SGX:QC7) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Q & M Dental Group (Singapore)

What Is Q & M Dental Group (Singapore)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Q & M Dental Group (Singapore) had S$77.4m of debt in December 2020, down from S$102.4m, one year before. However, it does have S$48.8m in cash offsetting this, leading to net debt of about S$28.6m.

A Look At Q & M Dental Group (Singapore)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Q & M Dental Group (Singapore) had liabilities of S$30.2m due within 12 months and liabilities of S$119.6m due beyond that. Offsetting this, it had S$48.8m in cash and S$18.2m in receivables that were due within 12 months. So its liabilities total S$82.9m more than the combination of its cash and short-term receivables.

Given Q & M Dental Group (Singapore) has a market capitalization of S$519.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.98 and interest cover of 6.8 times, it seems to us that Q & M Dental Group (Singapore) is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Even more impressive was the fact that Q & M Dental Group (Singapore) grew its EBIT by 129% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Q & M Dental Group (Singapore) 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Q & M Dental Group (Singapore) generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Q & M Dental Group (Singapore)'s conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its EBIT growth rate also supports that impression! It's also worth noting that Q & M Dental Group (Singapore) is in the Healthcare industry, which is often considered to be quite defensive. Considering this range of factors, it seems to us that Q & M Dental Group (Singapore) is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. 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 4 warning signs for Q & M Dental Group (Singapore) (of which 1 doesn't sit too well with us!) 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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