We Think Q & M Dental Group (Singapore) (SGX:QC7) Can Stay On Top Of Its 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Q & M Dental Group (Singapore) Limited (SGX:QC7) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that Q & M Dental Group (Singapore) had debt of S$84.9m at the end of June 2020, a reduction from S$89.1m over a year. However, because it has a cash reserve of S$41.6m, its net debt is less, at about S$43.3m.

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

Zooming in on the latest balance sheet data, we can see that Q & M Dental Group (Singapore) had liabilities of S$84.7m due within 12 months and liabilities of S$62.9m due beyond that. Offsetting this, it had S$41.6m in cash and S$22.3m in receivables that were due within 12 months. So it has liabilities totalling S$83.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Q & M Dental Group (Singapore) is worth S$374.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Q & M Dental Group (Singapore)'s debt is 2.7 times its EBITDA, and its EBIT cover its interest expense 2.7 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Investors should also be troubled by the fact that Q & M Dental Group (Singapore) saw its EBIT drop by 11% over the last twelve months. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. 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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Q & M Dental Group (Singapore) recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

On our analysis Q & M Dental Group (Singapore)'s conversion of EBIT to free cash flow should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. In particular, interest cover gives us cold feet. It's also worth noting that Q & M Dental Group (Singapore) is in the Healthcare industry, which is often considered to be quite defensive. Looking at all this data makes us feel a little cautious about Q & M Dental Group (Singapore)'s debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Q & M Dental Group (Singapore) has 2 warning signs (and 1 which is a bit concerning) we think 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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