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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Ensign Group
What Is Ensign Group's Debt?
As you can see below, Ensign Group had US$115.5m of debt at December 2020, down from US$327.9m a year prior. But it also has US$250.0m in cash to offset that, meaning it has US$134.5m net cash.
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$562.4m due within 12 months and liabilities of US$1.16b due beyond that. On the other hand, it had cash of US$250.0m and US$305.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.17b.
This deficit isn't so bad because Ensign Group is worth US$4.44b, and thus could probably raise enough capital to shore up 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!
In addition to that, we're happy to report that Ensign Group has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.