Elite Pharmaceuticals Inc (ELTP)

[no2koolaid]

I have answers and expanded explanations...that also frame my questions, thoughts, and observations…

What is the ROA for FY2021?

If we recall, I said this before…
The Return on Asset (ROA) performance in pharma ranged from (-)18.2% to (+) 11.6% and the average for pharma is + 6.6%. Where does Elite shake out on that ratio? Based on my math from the 3rd Q 2021, Elite’s ROA is 8.5%. Not only is it positive but it is greater than the pharma industry average!

Then we have Carter Ward’s take on relevant ratios we see additional reasons that we can consider Elite successful as a business…

There are three debt-related ratios that I focus on. And all three demonstrate just how relatively debt free we are in comparison to some of our peers in the generic market.

First is the ratio of long-term debt to current market cap. Now Elite’s long-term debt is less than 5% of our market cap. That compares to Teva, which is 190%, Amneal 340%, and Endo, which is 400%. So these companies, they each have loans that are two, three and four times their market caps and Elite is just the opposite. It's our market cap that's larger, and it's more than 20 times that of our long-term loans.

Second ratio, our focus on a lot is the ratio between long-term debt and equity. So Elite’s long-term debt is approximately 21% of its equity. And that compares with Teva, which is 202%, Amneal 973% and Endo, which has negative equity and more than $8 billion in long-term debt. So Elite’s debt is a fraction of its equity, while others have debts that are multiples of their equity.

The third ratio that really sticks out is the times interest earned ratio and that measures EBIT -- Earnings Before Interest and Taxes in relation to interest expense. So this is a ratio where the higher number indicates stronger financials due to revenues being greater than underlying debt and interest expense. So Elite’s times interest ratio is 18 that’s compared to three for Teva and one for Amneal, and one for Endo.

Moreover, considering that pharma firms are notoriously unprofitable, Elite is among a minority of pharma firms – big or small – expecting to show profit growth in the year 2021. Despite the external “noise” meant to confuse investors, it remains that Elite has reached the goal all businesses seek but few attain – repeated profitability. I know, there has been an increase in diluted shares, but there has not been added debt and this should matter to investors because… The periodical “Fierce Pharma” reported that, with many pharma firms unable to increase pricing to offset debt, it is increasing their credit risks. In fact, the S&P believes it will hand out more pharma company downgrades than upgrades in 2021. Of the more than 65 pharma companies it rates, 28% currently have negative business outlooks versus 68% with stable expectations, leaving only 4% with improving business outlooks reflect in increasing profitability.

Profit is much more valuable than the assets of the company. ... Lenders, investors, and vendors all use profit as a tool to measure how good management is in running their business. Profitability can be used to invest in R&D to expand the business portfolio. Businesses without profit cannot pay down debt, cannot meet its business expenses, increase working capital, or expand their business without incurring debt. This includes the ability to attract quality suppliers. For a small company that lacks the buyer power of a big firm, entering into effective supply agreements with quality companies can only be done when suppliers recognize the strength of being a small yet profitable company.

One more thought to ponder as we await the release of FY 2021…

Comparing revenue growth during Nasrat’s tenure and the dilution of shares…The numbers are 27,031,800 revenues projected for 2021 vs. 3,403,526 revenues in 2013. This equates to a 7.94 X in total revenues since Nasrat became CEO. And, to make sure we are looking at the “cost of revenues” as provided by the increase in outstanding/fully diluted shares (not debt), there was a 2.7 increase in fully diluted O/S 2013 vs. 2020 (with none through Q3 2021). That means the 7.94 increase in total revenues, and the attainment of profitability, was at the cost of 2.7 increase in full diluted O/S count. This means that the increase in revenues was 2.94 greater than the cost through the increase in share dilution. Stop for a moment and put that in perspective. If you could get nearly a 3 X return for the cost of an investment, what company or individual would not take it? Companies take on debt with the expectation that they will generate greater revenue than the cost of debt but the expectations are far less than 3X!

This may be more than can be digested, so I will stop here with this last point…. Stop looking at the past and complaining that certain things did not turn out as expected. That is a failure to understand the challenges presented by the external, competitive environment often require that firms adapt their strategy to succeed. Businesses look at the list of prospective threats and prorate expectations. Before 2020, risk management and CFOs identified the top ten list of threats to businesses and pandemics were at the bottom, lumped in with business disruption due to natural disasters. So, yes, sometimes the future does not turn out as expected and when that happens you need to adapt. Elite has done just that and attained profitability. Now, let's see what the Q4 numbers tell us.

N2K