Why e.l.f. Beauty's (NYSE:ELF) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from e.l.f. Beauty, Inc. (NYSE:ELF) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

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In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, e.l.f. Beauty increased the number of shares on issue by 5.2% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out e.l.f. Beauty's historical EPS growth by clicking on this link.

How Is Dilution Impacting e.l.f. Beauty's Earnings Per Share (EPS)?

e.l.f. Beauty has improved its profit over the last three years, with an annualized gain of 250% in that time. In comparison, earnings per share only gained 218% over the same period. Net profit actually dropped by 20% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 21%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If e.l.f. Beauty's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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.

Our Take On e.l.f. Beauty's Profit Performance

e.l.f. Beauty issued shares during the year, and that means its EPS performance lags its net income growth. Because of this, we think that it may be that e.l.f. Beauty's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into e.l.f. Beauty, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for e.l.f. Beauty and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of e.l.f. Beauty's profit. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.