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Does The Estée Lauder Companies Inc.'s (NYSE:EL) Debt Level Pose A Problem?

Simply Wall St

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as The Estée Lauder Companies Inc. (NYSE:EL) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Estée Lauder Companies’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into EL here.

View our latest analysis for Estée Lauder Companies

EL’s Debt (And Cash Flows)

EL has shrunk its total debt levels in the last twelve months, from US$3.8b to US$3.4b , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$2.4b , ready to be used for running the business. Moreover, EL has generated cash from operations of US$2.4b in the last twelve months, leading to an operating cash to total debt ratio of 71%, meaning that EL’s debt is appropriately covered by operating cash.

Can EL pay its short-term liabilities?

Looking at EL’s US$3.8b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.71x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Personal Products companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:EL Historical Debt, April 19th 2019

Is EL’s debt level acceptable?

EL is a relatively highly levered company with a debt-to-equity of 78%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For EL, the ratio of 32.17x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like EL are considered a risk-averse investment.

Next Steps:

EL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around EL's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure EL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Estée Lauder Companies to get a better picture of the large-cap by looking at:

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

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 editorial-team@simplywallst.com. 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.