e.l.f. Beauty (NYSE:ELF) Has A Rock Solid Balance Sheet

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that e.l.f. Beauty, Inc. (NYSE:ELF) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does e.l.f. Beauty Carry?

You can click the graphic below for the historical numbers, but it shows that e.l.f. Beauty had US$65.8m of debt in March 2023, down from US$95.4m, one year before. But on the other hand it also has US$120.8m in cash, leading to a US$55.0m net cash position.

How Healthy Is e.l.f. Beauty’s Balance Sheet?

According to the last reported balance sheet, e.l.f. Beauty had liabilities of US$108.0m due within 12 months, and liabilities of US$76.6m due beyond 12 months. On the other hand, it had cash of US$120.8m and US$67.9m worth of receivables due within a year. So it actually has US$4.12m more liquid assets than total liabilities.

Having regard to e.l.f. Beauty’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$5.67b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, e.l.f. Beauty boasts net cash, so it’s fair to say it does not have a heavy debt load!

Even more impressive was the fact that e.l.f. Beauty grew its EBIT by 129% over twelve months. That boost will make it even easier to pay down debt going forward. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if e.l.f. Beauty can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. e.l.f. Beauty may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, e.l.f. Beauty actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company’s debt, in this case e.l.f. Beauty has US$55.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$100m, being 125% of its EBIT. So is e.l.f. Beauty’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 2 warning signs for e.l.f. Beauty that you should be aware of.

If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

What are the risks and opportunities for e.l.f. Beauty?