David Iben expressed it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Modern Dental Group Limited (HKG: 3600) carries the debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Modern Dental Group
How much debt does the modern dental group carry?
You can click on the graph below for historical figures, but it shows Modern Dental Group owed HK $ 717.7million in June 2021, up from HK $ 823.3million a year earlier. However, he also had HK $ 693.8 million in cash, so his net debt is HK $ 23.9 million.
How healthy is Modern Dental Group’s balance sheet?
According to the latest published balance sheet, Modern Dental Group had a liability of HK $ 675.5 million due within 12 months and a liability of HK $ 646.8 million due beyond 12 months. In return, he had HK $ 693.8 million in cash and HK $ 563.6 million in receivables due within 12 months. It therefore has a liability totaling HK $ 65.0 million more than its combined cash and short-term receivables.
This state of affairs indicates that Modern Dental Group’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the HK $ 6.66 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. With virtually no net debt, Modern Dental Group is indeed very little in debt.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Modern Dental Group has very little debt (net of cash) and has a debt to EBITDA ratio of 0.039 and EBIT of 24.3 times interest expense. Compared to past profits, debt therefore seems insignificant. Even more impressive was the fact that Modern Dental Group increased its EBIT by 238% year over year. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Modern Dental Group’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Modern Dental Group has recorded free cash flow of 98% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
The good news is that Modern Dental Group’s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. We would also like to note that companies in the medical equipment industry like Modern Dental Group generally use debt with no problem. It seems Modern Dental Group has no trouble standing on its own, and it has no reason to fear its lenders. For investment nerds like us, his record is almost charming. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 1 warning sign with Modern Dental Group, and understanding them should be part of your investment process.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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