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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. 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?
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 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 Net Debt?
As you can see below, Ensign Group had US$278.3m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had US$47.0m in cash, and so its net debt is US$231.3m.
How Healthy Is Ensign Group's Balance Sheet?
The latest balance sheet data shows that Ensign Group had liabilities of US$327.3m due within a year, and liabilities of US$1.32b falling due after that. On the other hand, it had cash of US$47.0m and US$296.9m worth of receivables due within a year. So its liabilities total US$1.30b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Ensign Group has a market capitalization of US$2.67b, 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.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).