Is Q & M Dental Group (Singapore) (SGX:QC7) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Q & M Dental Group (Singapore) Limited (SGX:QC7) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, Q & M Dental Group (Singapore) had S$83.6m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had S$43.9m in cash, and so its net debt is S$39.8m.

How Healthy Is Q & M Dental Group (Singapore)'s Balance Sheet?

The latest balance sheet data shows that Q & M Dental Group (Singapore) had liabilities of S$28.7m due within a year, and liabilities of S$130.6m falling due after that. Offsetting these obligations, it had cash of S$43.9m as well as receivables valued at S$32.4m due within 12 months. So its liabilities total S$83.0m more than the combination of its cash and short-term receivables.

Since publicly traded Q & M Dental Group (Singapore) shares are worth a total of S$566.9m, it seems unlikely that this level of liabilities would be a major 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.

Q & M Dental Group (Singapore)'s net debt is only 1.0 times its EBITDA. And its EBIT easily covers its interest expense, being 10.6 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Q & M Dental Group (Singapore) grew its EBIT by 138% over twelve months. That boost will make it even easier to pay down debt going forward. 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.

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. During the last three years, Q & M Dental Group (Singapore) generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, Q & M Dental Group (Singapore)'s impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Q & M Dental Group (Singapore) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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