Investors are always looking for growth in small-cap stocks like elf Beauty Inc (NYSE:ELF), with a market cap of US$517m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ELF here.
How much cash does ELF generate through its operations?
ELF has shrunken its total debt levels in the last twelve months, from US$175m to US$152m , which is made up of current and long term debt. With this debt repayment, ELF currently has US$17m remaining in cash and short-term investments for investing into the business. Additionally, ELF has produced US$47m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31%, signalling that ELF’s debt is 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 0.31x cash from its debt capital.
Can ELF pay its short-term liabilities?
With current liabilities at US$32m, the company has been able to meet these obligations given the level of current assets of US$115m, with a current ratio of 3.58x. However, many consider anything above 3x to be quite high and could mean that ELF has too much idle capital in low-earning investments.
Can ELF service its debt comfortably?
With a debt-to-equity ratio of 75%, 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. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ELF’s case, the ratio of 3.87x 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.
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. Keep in mind I haven’t considered other factors such as how ELF has been performing in the past. I suggest you continue to research e.l.f. Beauty to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
- 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.