To gain a more complete understanding, we need to consider additional financial metrics, one of which is the net debt-to-EBITDA ratio. This measure takes into account two key factors: net debt (which is debt minus cash) and EBITDA (a measure of a company's ability to generate cash). The net debt-to-EBITDA ratio shows how many years it would take for a company to pay off its debt, assuming both net debt and EBITDA remain constant. If a company has more cash than debt, the ratio can be negative. Neither extreme is ideal. A higher ratio indicates a more leveraged company that may struggle to pay off its debt, while a highly negative ratio suggests excess, underutilized cash that isn't being invested effectively (“I prefer assets to cash,” as Warren Buffet once said).
Among the eight beauty companies we track, they carry a weighted average of nearly one year's worth of debt, heavily influenced by L'Oréal's weighting in the portfolio.
On the under-leveraged side, AmorePacific Group (and Beiersdorf) stand out—perhaps signaling a potential acquisition on the horizon? On the opposite end, Coty appears to have nearly five years' worth of debt to repay, with a forecasted ratio of 4x for 2024. As for Estée Lauder, despite its strong cash position, it would take the company three years to cover its debt, making it second best in terms of cash but second worst in terms of this metric.
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