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What does el.f. Beauty Inc.’s (NYSE:ELF) Balance Sheet Tell Us About Its Future?

Andrew Carroll

el.f. Beauty Inc. (NYSE:ELF) is a small-cap stock with a market capitalization of US$948.96M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ELF here.

Does ELF generate an acceptable amount of cash through operations?

ELF has shrunken its total debt levels in the last twelve months, from US$164.83M to US$156.35M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$10.06M , ready to deploy into the business. Moreover, ELF has generated cash from operations of US$12.38M over the same time period, leading to an operating cash to total debt ratio of 7.92%, indicating that ELF’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ELF’s case, it is able to generate 0.079x cash from its debt capital.

Can ELF meet its short-term obligations with the cash in hand?

Looking at ELF’s most recent US$51.36M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.41x. Generally, for Personal Products companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:ELF Historical Debt May 18th 18

Is ELF’s debt level acceptable?

With a debt-to-equity ratio of 77.82%, ELF can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ELF’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 ELF, the ratio of 3.73x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

ELF’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ELF’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research e.l.f. Beauty to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ELF’s future growth? Take a look at our free research report of analyst consensus for ELF’s outlook.
  2. Valuation: What is ELF 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 ELF is currently mispriced by the market.
  3. 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.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.