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Mid-caps stocks, like Encompass Health Corporation (NYSE:EHC) with a market capitalization of US$6.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. EHC’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EHC here.
Does EHC Produce Much Cash Relative To Its Debt?
EHC's debt levels surged from US$2.6b to US$2.9b over the last 12 months , which includes long-term debt. With this increase in debt, EHC currently has US$56m remaining in cash and short-term investments to keep the business going. On top of this, EHC has produced cash from operations of US$706m in the last twelve months, leading to an operating cash to total debt ratio of 25%, meaning that EHC’s current level of operating cash is high enough to cover debt.
Can EHC meet its short-term obligations with the cash in hand?
With current liabilities at US$768m, the company may not be able to easily meet these obligations given the level of current assets of US$683m, with a current ratio of 0.89x. The current ratio is calculated by dividing current assets by current liabilities.
Does EHC face the risk of succumbing to its debt-load?
EHC is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if EHC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For EHC, the ratio of 4.7x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EHC ample headroom to grow its debt facilities.
Although EHC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for EHC's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Encompass Health to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EHC’s future growth? Take a look at our free research report of analyst consensus for EHC’s outlook.
- Valuation: What is EHC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EHC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.