While small-cap stocks, such as Q & M Dental Group (Singapore) Limited (SGX:QC7) with its market cap of S$401m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into QC7 here.

How does QC7’s operating cash flow stack up against its debt?

QC7 has sustained its debt level by about S$87m over the last 12 months which accounts for long term debt. At this constant level of debt, QC7 currently has S$23m remaining in cash and short-term investments , ready to deploy into the business. Additionally, QC7 has generated S$14m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 16%, meaning that QC7’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In QC7’s case, it is able to generate 0.16x cash from its debt capital.

Can QC7 meet its short-term obligations with the cash in hand?

At the current liabilities level of S$13m, the company has been able to meet these obligations given the level of current assets of S$52m, with a current ratio of 3.97x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

Can QC7 service its debt comfortably?

With debt reaching 78% of equity, QC7 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether QC7 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In QC7’s, case, the ratio of 4.34x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as QC7’s high interest coverage is seen as responsible and safe practice.

Next Steps:

QC7’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure QC7 has company-specific issues impacting its capital structure decisions. You should continue to research Q & M Dental Group (Singapore) to get a more holistic view of the small-cap by looking at: