The market for e.l.f. Beauty, Inc.'s (NYSE:ELF) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that e.l.f. Beauty's profit was reduced by US$2.6m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect e.l.f. Beauty to produce a higher profit next year, all else being equal.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that e.l.f. Beauty received a tax benefit which contributed US$2.5m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.
Our Take On e.l.f. Beauty's Profit Performance
In its last report e.l.f. Beauty received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Given the contrasting considerations, we don't have a strong view as to whether e.l.f. Beauty's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing e.l.f. Beauty at this point in time. When we did our research, we found 5 warning signs for e.l.f. Beauty (1 is significant!) that we believe deserve your full attention.
Our examination of e.l.f. Beauty has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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