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Is e.l.f. Beauty, Inc. (NYSE:ELF) A Financially Sound Company?

Simply Wall St

Investors are always looking for growth in small-cap stocks like e.l.f. Beauty, Inc. (NYSE:ELF), with a market cap of US$596m. However, an important fact which most ignore is: how financially healthy is the business? Given that ELF is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into ELF here.

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Does ELF Produce Much Cash Relative To Its Debt?

ELF has built up its total debt levels in the last twelve months, from US$154m to US$168m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$54m to keep the business going. Additionally, ELF has produced cash from operations of US$59m in the last twelve months, resulting in an operating cash to total debt ratio of 35%, indicating that ELF’s debt is appropriately covered by operating cash.

Does ELF’s liquid assets cover its short-term commitments?

At the current liabilities level of US$45m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.04x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered high by some.

NYSE:ELF Historical Debt, May 21st 2019

Does ELF face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 78%, ELF can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since ELF is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

ELF’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ELF's financial health. Other important fundamentals need to be considered alongside. You should continue to research e.l.f. Beauty to get a more holistic view of the small-cap 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.

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.