Since its listing in 2009, Q&M Dental Group (Singapore) Limited (SGX: QC7) has grown its clinic network from just 37 dental clinics to 85 dental and four medical clinics in 2017. Consequently, both the company’s revenue and earnings per share have increased since then.
That said, the group’s record of growth has somewhat stagnated in more recent years. The increasingly challenging Singapore market has also put greater pressure on the group’s profitability. Going forward, I think it is unlikely that the group can return to its former glory days of growth. Here’s why.
One of my biggest concerns about the group is that in its attempt to grow through acquisitions, it may have overstretched its balance sheet. Below is the trend of the company’s debt-to-equity ratio over the past five years.
Source: SGX StockFacts
As you can see, the group’s debt has steadily increased over the period of study. The debt-to-equity ratio now hovers close to the 80% mark. The high leverage ratio might limit the group’s ability to make debt-funded acquisitions in the future.
To assess if the group has the liquidity to pay off its short-term financial obligations, I took a look at its current ratio. The current ratio is calculated by dividing the current assets of the company by the current liabilities. A ratio below one suggests that the company has insufficient cash to pay off its short-term debt.
Source: SGX StockFacts
The chart above shows the trend of the Q&M’s current ratio over the years. As you can see, there is a downward trend that suggests that the group may have been too aggressive with its expansion policy. Furthermore, on 31 December 2017, the group had a current ratio of just 0.8. Despite securing additional loan facilities in January to pay off its short-term debt, the fact that it allowed its balance sheet to reach this state is certainly concerning.
Limited organic growth
With a weaker balance sheet than before, the group will have a lower capacity to acquire and grow its clinic network. Therefore, organic income growth within its existing clinic network will be of more importance in the coming years.
However, with other large private healthcare providers moving into the dental services market in Singapore, Q&M dental will inevitably face stiffer competition and pricing pressures for its services.
The Foolish bottom line
Q&M dental used to be one of the star growth stocks in Singapore. Its active pursuit of acquisitions and a consistently growing network of clinics were the key growth drivers of its business. Unfortunately, in recent years, this one-time stock market darling has not fared so well. Furthermore, with current market conditions and its hyper-extended balance sheet, I fear that the worst is yet to come.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.