Is Ensign Group (NASDAQ:ENSG) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies The Ensign Group, Inc. (NASDAQ:ENSG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ensign Group

How Much Debt Does Ensign Group Carry?

The chart below, which you can click on for greater detail, shows that Ensign Group had US$145.7m in debt in December 2024; about the same as the year before. But it also has US$526.9m in cash to offset that, meaning it has US$381.2m net cash.

How Healthy Is Ensign Group's Balance Sheet?

We can see from the most recent balance sheet that Ensign Group had liabilities of US$743.4m falling due within a year, and liabilities of US$2.09b due beyond that. Offsetting these obligations, it had cash of US$526.9m as well as receivables valued at US$569.9m due within 12 months. So it has liabilities totalling US$1.73b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Ensign Group is worth US$7.20b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Ensign Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Ensign Group has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ensign Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the most recent three years, Ensign Group recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$381.2m. And it impressed us with its EBIT growth of 40% over the last year. So is Ensign Group's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Ensign Group's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.