Is Ensign Group (NASDAQ:ENSG) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that The Ensign Group, Inc. (NASDAQ:ENSG) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ensign Group

What Is Ensign Group's Debt?

The chart below, which you can click on for greater detail, shows that Ensign Group had US$151.3m in debt in June 2023; about the same as the year before. But on the other hand it also has US$440.0m in cash, leading to a US$288.7m net cash position.

How Strong Is Ensign Group's Balance Sheet?

The latest balance sheet data shows that Ensign Group had liabilities of US$619.0m due within a year, and liabilities of US$1.94b falling due after that. Offsetting these obligations, it had cash of US$440.0m as well as receivables valued at US$446.0m due within 12 months. So its liabilities total US$1.67b more than the combination of its cash and short-term receivables.

Ensign Group has a market capitalization of US$5.49b, so it could very likely raise cash to ameliorate 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. Despite its noteworthy liabilities, Ensign Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ensign Group has increased its EBIT by 8.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ensign Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ensign Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Ensign Group produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Ensign Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$288.7m. So we don't have any problem with Ensign Group's use of debt. 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.