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e.l.f. Beauty, Inc.’s (NYSE:ELF) Most Important Factor To Consider

David Rizzo

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e.l.f. Beauty, Inc. (NYSE:ELF) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, ELF is currently valued at US$453m. I will take you through ELF’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

View our latest analysis for e.l.f. Beauty

Is e.l.f. Beauty generating enough cash?

e.l.f. Beauty generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

There are two methods I will use to evaluate the quality of e.l.f. Beauty’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Although, e.l.f. Beauty generate sufficient cash from its operational activities, its FCF yield of 7.98% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.

NYSE:ELF Net Worth February 18th 19

What’s the cash flow outlook for e.l.f. Beauty?

Can ELF improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, ELF is expected to deliver a decline in operating cash flow compared to the most recent level of US$54m, which is not an encouraging sign. However, breaking down growth into a year on year basis, ELF ‘s negative growth rate improves each year, from -18% next year, to 4.9% in the following year.

Next Steps:

Its positive operating cash flow is a good sign of disciplined operational efficiency, leading to a yield in-line to the market portfolio. However, if you factor in the higher risk of holding just e.l.f. Beauty compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, You should continue to research e.l.f. Beauty to get a more holistic view of the company by looking at:

  1. 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.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on e.l.f. Beauty’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through 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. On rare occasion, data errors may occur. Thank you for reading.