Breaking Down Encompass Health Corporation (EHC) Financial Health: Key Insights for Investors

You might have seen the headlines after Encompass Health Corporation's Q3 2025 earnings: strong numbers, but a stock dip. That disconnect is exactly what seasoned investors need to break down right now. The company delivered a solid quarter, reporting net operating revenue of $1,477.5 million, a 9.4% jump year-over-year, and raised its full-year Adjusted EPS guidance to a midpoint of $5.30. That's a clear signal of operational strength, plus they opened three new hospitals in the quarter. But here's the rub: same-store discharge growth slowed to 2.9%, down significantly from 6.8% in the prior-year quarter, and that's what spooked the market, despite the Adjusted EBITDA hitting $300.1 million. So, is this just a quarterly fluctuation, or is it a defintely sign of a deeper volume headwind that could challenge the full-year Adjusted EBITDA guidance of $1.25 billion? We're mapping out the real risk and opportunity in these numbers.

Revenue Analysis

If you are looking at Encompass Health Corporation (EHC), the direct takeaway is that revenue growth remains robust, driven by its core business-inpatient rehabilitation-and strategic capacity expansion. The company reconfirmed its full-year 2025 revenue guidance, projecting a midpoint of $5.93 billion, reflecting a steady, predictable top-line performance in a growing sector.

This stability is grounded in their Q3 2025 net operating revenue of $1,477.5 million, which marks a strong year-over-year increase of 9.4% compared to the prior year's third quarter. This growth rate is defintely a key signal of operational health, showing that EHC is effectively capturing market demand for post-acute care. Here's the quick math: for the first nine months of 2025, sales totaled $4,390.6 million, up significantly from $3,968.2 million in the same period last year.

The primary revenue source for Encompass Health Corporation is overwhelmingly its network of inpatient rehabilitation hospitals. To be fair, the company is the largest owner and operator in the US, so this focus is expected.

The core business segment breakdown is stark, showing where the company's focus and revenue power truly lies. Looking at the Q2 2025 data, you can see this clearly:

• Inpatient Net Operating Revenues: $1.41 billion (approximately 96.6% of total revenue).
• Outpatient and Other Net Operating Revenues: $44 million (approximately 3.0% of total revenue).

The inpatient segment is the engine, growing at an impressive 11.7% year-over-year in Q2 2025, while the smaller outpatient and other segment saw an even faster growth rate of 23.3% in the same period. The revenue per discharge is also climbing, reaching $21,679 in Q3 2025, which is a 3.3% increase from a year prior, demonstrating solid pricing power and favorable patient mix.

The most significant change in the revenue stream is the growth composition. While total revenue is up, the same-store discharge growth-meaning growth from existing hospitals-moderated to 2.9% in Q3 2025. This tells you that a substantial portion of the overall 9.4% revenue growth is coming from new capacity additions. EHC opened three new hospitals and added 39 beds to existing hospitals in Q3 alone, a clear strategy to drive top-line expansion. You can read more about their strategic focus in their Mission Statement, Vision, & Core Values of Encompass Health Corporation (EHC).

Here is a summary of the key performance indicators for the most recent quarter:

What this estimate hides is the risk of slowing same-store volume growth, which management attributes to tough prior-year comparisons and the timing of new facility ramp-ups. The action item for investors is to monitor the occupancy rates of those newly opened hospitals, as they are now the primary lever for maintaining the high growth trajectory.

Profitability Metrics

You want to know if Encompass Health Corporation (EHC) is actually making money, and how efficiently. The short answer is yes, and their operational efficiency is a key differentiator in the post-acute care space. For the 2025 fiscal year, the company is demonstrating margin expansion, a clear signal that their strategy is working.

Looking at the full-year 2025 guidance midpoint, Encompass Health Corporation expects net operating revenue to land around $5.89 billion. This revenue is translating to healthy margins across the board, which is defintely a positive sign for investors.

• Gross Profit Margin: EHC's gross profit margin for the quarter ended September 30, 2025, stood at an impressive 95.63%. This metric is high because most of their costs, like salaries and administrative overhead, are classified as operating expenses below the gross profit line, common for a service-heavy business like inpatient rehabilitation.
• Operating Profit Margin (Adjusted): While the GAAP operating margin requires a full calculation, the Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin is a strong proxy for operational efficiency. The 2025 guidance midpoint of $1.205 billion in Adjusted EBITDA on the expected revenue suggests an Adjusted EBITDA margin of approximately 20.46%. This indicates robust control over day-to-day operating expenses.
• Net Profit Margin: The net profit margin has shown significant improvement, hitting 9.3%, up from 8.3% last year. This means that for every dollar of revenue, Encompass Health Corporation is keeping about 9.3 cents as profit. Analysts are forecasting this to climb to 9.9% over the next three years.

Operational Efficiency and Industry Comparison

The trend in profitability is clearly upward. Net profit margins rising from 8.3% to 9.3% in the recent period is a strong indicator of improved operational efficiency and cost management. This isn't just about higher patient volume; it reflects expense leverage from their growing hospital base and smart technology use.

Here's the quick math on profitability: using the trailing twelve months (TTM) net income of $541 million as of September 30, 2025, the company is converting a substantial portion of its revenue into bottom-line profit. This efficiency is critical in the healthcare sector where cost pressures are constant.

To be fair, comparing EHC's margins to the broader post-acute care industry shows a significant gap, which highlights EHC's differentiated position as a leader in Inpatient Rehabilitation Facilities (IRF). For instance, the average total margin for freestanding Skilled Nursing Facilities (SNFs) in 2023 was a very thin 0.4%. EHC's 9.3% net margin is miles ahead of that, confirming their competitive advantage and premium service model.

The company's ability to maintain a gross margin above 95% while expanding its hospital footprint and increasing patient discharges (up 5.0% in Q3 2025) demonstrates effective cost control despite rising labor costs in the sector. You can dive deeper into the strategic implications of these numbers in our full report: Breaking Down Encompass Health Corporation (EHC) Financial Health: Key Insights for Investors.

Here is a snapshot of the key profitability metrics to ground your investment decision:

Your next step should be to look closely at the cost components, especially salaries and benefits, to see how EHC is managing labor inflation, which is the biggest risk to that 20.46% operating margin.

Debt vs. Equity Structure

You're looking at Encompass Health Corporation (EHC) and trying to figure out if their growth is responsibly financed, which is smart. The short answer is that EHC maintains a moderate, well-managed debt load, favoring a balanced capital structure that has become less reliant on leverage over time. This approach keeps their financial foundation solid for continued expansion.

As of the third quarter of 2025 (Q3 2025), Encompass Health Corporation's total debt sits at approximately $2.43 billion. This is the combination of their long-term obligations and what's due soon. Specifically, the long-term debt, net of the current portion, was $2.3939 billion, with the current portion of long-term debt-what's payable within the next year-at a manageable $39.0 million.

Here's the quick math on their financing mix:

• Total Debt (Q3 2025): Approximately $2.43 billion
• Total Shareholder Equity (Proxy for 2025): Approximately $3.2 billion

The key metric here is the debt-to-equity (D/E) ratio, which tells you how much debt the company uses to finance its assets relative to the value of shareholders' equity. For EHC, the D/E ratio is currently reported around 0.76. To be fair, other reports show it slightly higher, but the trend is what matters. This means for every dollar of equity, the company has about 76 cents of debt. This is a significant improvement, as the ratio has reduced from 1.24 over the past 12 months.

Compared to the broader healthcare services industry, which often maintains lower leverage due to regulatory and operational stability needs, EHC's ratio is healthy. Capital-intensive industries like utilities might run higher, but for EHC, a D/E ratio below 1.0 suggests a preference for equity funding over heavy debt, which is defintely a good sign for stability. This conservative balance sheet allows them to fund the development of new hospitals and expansion projects without taking on excessive risk.

The company is proactive in managing its debt maturities. For instance, in August 2024, Encompass Health Corporation used cash on hand to redeem $150 million of its 5.75% senior notes that were due in 2025. This pre-emptive move reduces near-term refinancing risk. Also, S&P Global Ratings upgraded the company's issuer credit rating to 'BB' from 'BB-' in late 2024, reflecting an expectation of sustained lower leverage, projecting the S&P-adjusted debt-to-EBITDA ratio to remain below 3x in 2025. This credit rating improvement lowers their future borrowing costs and signals a stronger financial profile to the market.

EHC balances debt financing-which is cheaper than equity and provides a tax shield-with equity funding to maintain flexibility. They use debt primarily to fund capital expenditures for new facilities and strategic acquisitions, while relying on strong operating cash flow to service that debt. They are not afraid to use debt, but they keep it well-covered. If you want to dive deeper into who is buying into this strategy, you can check out Exploring Encompass Health Corporation (EHC) Investor Profile: Who's Buying and Why?

Liquidity and Solvency

Encompass Health Corporation (EHC) demonstrates a tight, but manageable, liquidity position, relying heavily on its consistent operating cash flow to fund its significant growth capital expenditures. Your core takeaway here is that while the balance sheet ratios are lean, the cash-generating engine of the business is strong enough to cover short-term obligations and expansion plans.

Liquidity is about the ability to meet near-term obligations, and for EHC in the 2025 fiscal year, the picture is one of efficiency rather than excess. The current ratio, which compares current assets to current liabilities, sits at about 1.14. This is not a huge buffer, but it's above the critical 1.0 mark. The quick ratio, which strips out less-liquid inventory, is just slightly lower at 1.06.

Here's the quick math: A ratio near 1.0 means current assets only just cover current liabilities. This is common in a capital-intensive, high-volume service business like healthcare. It's defintely not a sign of a massive cash hoard, but it suggests management is running a very lean working capital (current assets minus current liabilities) model. It's efficient, but leaves little margin for error if there's an unexpected revenue cycle disruption.

The real strength lies in the cash flow statement, which shows the true movement of money. EHC's operating activities are a consistent source of cash, a major strength. In the third quarter of 2025, cash flows provided by operating activities were a solid $270.8 million. This is the lifeblood of the company, and it's flowing strong.

However, that cash is immediately put to work. The trends in the other two cash flow sections reveal the company's aggressive expansion strategy. This is where the cash goes:

• Operating Cash Flow (CFO): Strong and positive, covering day-to-day operations.
• Investing Cash Flow (CFI): Consistently a large cash outflow, reflecting capital expenditures (CapEx) for new hospitals and capacity additions. For example, Q1 2025 saw ($158.5 million) used in investing activities.
• Financing Cash Flow (CFF): This is a mix. Q1 2025 showed ($130.4 million) used in financing activities, covering dividends of $0.19 per share and debt management.

The consistent investment is why the cash balance itself is low, falling to about $48.7 million by Q3 2025. This isn't a liquidity crisis, but a strategic choice-they are spending cash to grow the business rather than stockpiling it. The trade-off is higher leverage; long-term debt rose to about $2.394 billion by Q3 2025.

To be fair, the company's strong cash generation capacity is what allows them to carry this debt and maintain a lean balance sheet. You can see their strategic focus on growth by reviewing their Mission Statement, Vision, & Core Values of Encompass Health Corporation (EHC).

Here is a snapshot of the key liquidity metrics for a quick comparison:

The primary risk is a disruption to cash flow from operations, perhaps due to a change in reimbursement rates or a major regulatory shift. If that CFO stream slows, the low current ratio and high debt would become a much bigger problem. For now, the strong operating performance is the stabilizing force.

Valuation Analysis

You want to know if Encompass Health Corporation (EHC) is a good buy right now, and the quick answer is that the market consensus leans toward 'Buy,' but the valuation metrics suggest the stock is priced for growth, not a deep bargain. The current price of around $112.77 is trading close to its 52-week high of $127.99, reflecting strong analyst confidence in its post-acute care model.

To be fair, the stock is defintely not cheap based on traditional metrics, but that's often the case with quality, growing healthcare providers. Here's the quick math on where Encompass Health Corporation (EHC) stands against its expected 2025 performance.

Is Encompass Health Corporation (EHC) Overvalued or Undervalued?

The core valuation ratios for Encompass Health Corporation (EHC) suggest the market is pricing in the company's projected earnings growth. For the 2025 fiscal year, the projected Price-to-Earnings (P/E) ratio is approximately 24.2x. This is higher than the trailing P/E of 21.32, indicating investors expect earnings to rise significantly.

When we look at the Enterprise Value-to-EBITDA (EV/EBITDA) ratio, which is a better measure for capital-intensive businesses like hospitals, the 2025 forecast is around 12.2x. This multiple is higher than many broad healthcare services benchmarks, signaling a premium valuation for the company's robust cash flow generation. The Price-to-Book (P/B) ratio, which compares the stock price to the company's book value per share, is also elevated at a projected 4.41x for 2025. This shows the market values Encompass Health Corporation (EHC) far above its net asset value, which is typical for a service-based business with high returns on equity.

Stock Price Trends and Analyst Consensus

The stock has shown resilience over the last 12 months, trading in a range between its 52-week low of $87.85 and a high of $127.99. The current price of $112.77 is firmly in the upper half of this range, suggesting positive momentum.

The analyst community is overwhelmingly bullish on Encompass Health Corporation (EHC). Out of eleven brokerages covering the stock, the average rating is a strong 'Buy,' with eight analysts rating it 'Buy' and three giving a 'Strong Buy' recommendation. The average 12-month price target is set at $142.86, which implies a potential upside of over 26% from the current price. This consensus is a clear signal of confidence in the company's strategic direction, which you can read more about in their Mission Statement, Vision, & Core Values of Encompass Health Corporation (EHC).

• Current Price (Nov 2025): $112.77.
• Average Price Target: $142.86.
• Analyst Consensus: Strong 'Buy' rating.

Dividend Profile: Yield and Payout

Encompass Health Corporation (EHC) is not primarily a dividend stock, but it does offer a modest yield. The current annual dividend yield is a low 0.7%, based on an annualized dividend of $0.76 per share.

The good news is the dividend is highly sustainable. The dividend payout ratio (DPR) is very conservative at approximately 14.37%. This low payout means the company is retaining the vast majority of its earnings to fund its expansion plans and new hospital developments. For a growth-focused healthcare company, retaining capital is a much better use of funds than paying a high dividend.

Next step: Dig into the company's capital expenditure plans for 2026 to see if the retained earnings are being deployed efficiently to justify the premium valuation.

Risk Factors

You need to look past the strong headline numbers-like the raised 2025 full-year guidance for Adjusted EBITDA to $1.25 billion at the midpoint-because Encompass Health Corporation (EHC) faces a perfect storm of legal, regulatory, and operational risks that could defintely erode those gains.

The company's core financial health is currently being stress-tested by three major headwinds. The first is a massive reputational and legal fallout, the second is a critical dependency on government payers, and the third is the relentless pressure of labor costs. This isn't just noise; it's a structural challenge to their inpatient rehabilitation facility (IRF) model.

Legal and Reputational Storm

The most immediate and damaging risk is the fallout from a July 2025 New York Times exposé detailing systemic patient safety failures. This report immediately triggered a 10.3% drop in the stock price, wiping out approximately $1.2 billion in market capitalization. Securities class-action lawsuits followed quickly, alleging EHC concealed operational risks and that executives engaged in insider trading, notably CFO Douglas Coltharp selling millions in shares during Q2 2025.

The financial risk here is concrete: potential settlements could exceed $250 million, based on precedents in similar healthcare sector cases. Here's the quick math on the stock drop: a 10.3% decline in a single day is a serious signal of lost investor confidence. The company needs to show immediate, verifiable improvements in patient safety-internal data cited in the exposé suggested preventable readmissions were 20% higher than industry averages.

• Legal exposure may top $250 million.
• Governance issues are a major investor concern.

Regulatory and Reimbursement Headwinds

Encompass Health Corporation's revenue is highly concentrated, making it acutely vulnerable to shifts in government policy. Approximately 60% of EHC's revenue is tied to Medicare and Medicaid. Looking at the Q3 2025 revenue breakdown, this dependency is clear:

Increased scrutiny from the Centers for Medicare & Medicaid Services (CMS) is a clear threat. Policy changes, like new site-neutral payment proposals or the phasing out of the 'inpatient-only' list, could materially impact the net patient revenue per discharge, which was $21,679 in Q3 2025. What this estimate hides is the potential for CMS to reduce reimbursement for facilities with poor safety records, directly hitting EHC's profitability.

Operational and Competition Risks

Despite strong Q3 2025 Net Operating Revenue of $1,477.5 million, operational execution shows signs of strain. The biggest near-term risk remains labor market pressures and wage inflation, which directly threaten operating margins. Plus, same-store discharge growth-a key metric for a growing hospital chain-slowed to just 2.9% in Q3 2025, down significantly from 6.8% in the same quarter last year.

The company's mitigation strategy centers on capacity expansion to capture unmet demand. For the full year 2025, EHC plans to open 8 new hospitals and add 100-120 beds to existing facilities. They are also investing in technology and value-based care models to improve efficiency and patient outcomes, which is the right strategic move to counteract regulatory pressure. To learn more about the positive financial trends, read Breaking Down Encompass Health Corporation (EHC) Financial Health: Key Insights for Investors.

The core action for EHC is to execute its expansion plan while simultaneously stabilizing labor costs and, most importantly, restoring trust by demonstrating tangible patient safety improvements.

Growth Opportunities

You're looking at Encompass Health Corporation (EHC) and wondering if the growth story has legs, especially with the 2025 numbers coming in strong. The short answer is yes, the core drivers are structural and management is executing well on a clear expansion roadmap. They are defintely capitalizing on the aging US population and the persistent undersupply of high-quality inpatient rehabilitation beds.

The company's updated 2025 guidance, following strong Q3 results, points to a robust year. Analysts are now projecting full-year net operating revenue to hit around $5.94 billion, with adjusted earnings per share (EPS) estimated at $5.58 per share. This upward revision signals a high degree of management confidence, and honestly, the math is simple: more beds plus higher patient volume equals more revenue.

Here's the quick math on their expansion strategy:

• Open 6 to 10 de novo hospitals (new facilities) per year through 2027.
• Add 80 to 120 beds annually to existing hospitals.
• The 2025 plan specifically includes opening 8 new hospitals and adding 100 to 120 beds.

In Q3 2025 alone, Encompass Health Corporation opened three new hospitals and added 39 beds to existing facilities, which drove a 9.4% increase in net operating revenue for the quarter to $1,477.5 million. This aggressive capacity expansion is the primary near-term catalyst for growth.

What this estimate hides is the underlying demographic trend-the surge in the 65-plus population-which creates a durable, long-term demand curve for their specialized post-acute care (rehabilitation services). They are also actively pursuing strategic partnerships and acquisitions to further expand their market reach, which is a smart way to accelerate growth beyond organic de novo builds.

The competitive advantage for Encompass Health Corporation isn't just their size-they are the largest owner and operator of inpatient rehabilitation hospitals in the US-but their focus on clinical efficiency. Their data-driven approach and clinical expertise help reduce high-cost outlier stipends, which ultimately lowers costs for the overall healthcare system. They are also investing heavily in technology and innovation, using proprietary predictive models and rolling out services like in-house dialysis in 110 hospitals as of Q1 2025. That's a clear differentiator for patient satisfaction and care quality.

The company's full-year 2025 financial guidance is a tight range, reflecting operational clarity:

The biggest risk, to be fair, is labor shortages, which could pressure operating margins if wage inflation continues, but the company's strong financial position, with no significant debt maturities until 2028, gives them the flexibility to manage these headwinds. If you want a deeper dive into the valuation and risks, you can read our full analysis here: Breaking Down Encompass Health Corporation (EHC) Financial Health: Key Insights for Investors.