Ensign Group (NASDAQ:ENSG) Has A Pretty Healthy Balance Sheet

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 can see that The Ensign Group, Inc. (NASDAQ:ENSG) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ensign Group

What Is Ensign Group's Debt?

As you can see below, Ensign Group had US$146.6m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$571.0m in cash, leading to a US$424.4m net cash position.

A Look At Ensign Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Ensign Group had liabilities of US$768.9m due within 12 months and liabilities of US$2.11b due beyond that. Offsetting these obligations, it had cash of US$571.0m as well as receivables valued at US$554.1m due within 12 months. So it has liabilities totalling US$1.75b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Ensign Group has a market capitalization of US$8.48b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Ensign Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Ensign Group saw its EBIT drop by 8.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Ensign Group 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. While Ensign Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Ensign Group recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Ensign Group does have more liabilities than liquid assets, it also has net cash of US$424.4m. So we are not troubled with Ensign Group's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Ensign Group, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.