Elite Pharmaceuticals Inc (ELTP)

[no2koolaid]

OMG.. here comes the spin

There is no spin. When one knows what to look for that helps define business success, it is clear that such a suggestion fails the test of business knowledge.

Let’s talk business…

McDonald’s has had total revenues decrease every year since 2013, does that mean they are in trouble? No, obviously not because total revenues do not provide the complete picture. Speaking of burgers, Shake Shack sells burgers at a price point on average 3 X higher than MCD does. Does that make them more profitable?

Those were softball questions. Now, let’s talk real business and some key ratios.

Let’s start with easy…

The current ratio is a liquidity ratio. Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. The current ratio measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities.

In 2013, when Nasrat started, Elite’s current ratio was less than 0.50 and, to be clear, anything less than 1.0 indicates the company does not have sufficient assets to meet its liabilities, which puts a company in position for bankruptcy. With that as our grounding, in FY 2020, Elite’s current ratio at years end was 1.19. In 2021, their current ratio was 2.10. That means Elite has the ability to meet its short-term financial needs 2.1 X. That is excellent. Now, let’s check some other key ratios that tell us how Elite is positioned.

I recently mentioned Return on Assets, so what do they tell us and where does Elite stand? Return on Assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. ROA is displayed as a percentage, the higher the ROA the better. So, where is Elite and, on a comparative basis, how does it compare to other pharma firms?

Well, the average ROA for pharma is 4.07. And Elite has been ratcheting up its ROA over 2021 vs. 2020 (another reason that Q-Q matters less than FY-FY). For Elite, its FY 2021 ROA is a very healthy 19.4%...more than 4 X the pharma average and more than 2X what it was at the start of 2021. Again, this is about how efficient Elite is in using assets to generate earnings. Some believe that ROA is one of the most important ratios when considering how effectively a company operates to generate earnings.

Then we have working capital, and the greater the working capital generated the better it is because working capital is the money a company has to cover all of its short-term expenses, including inventory, payments on short-term debt, and day-to-day operating expenses. Working capital is critical since it is used to keep a business operating smoothly and meet all its financial obligations within the coming year, further enabling business development.

In 2020, Elite’s working capital was $1.612 Million and in 2021, Elite’s working capital generated by its business was $6.382 Million. An increase of 3.96X. It means Elite can do more to develop its business.

What about gross profit? Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Thus, the benefits are obvious. Well, Elite’s gross profit – a first in 2020 – was $7.979 Million. In 2021, it was $11.867 Million…an increase of 49%.

Then there is gross profit margin. Gross profit margin is a metric analysts use to assess a company's financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold (COGS). Gross profit margin is frequently expressed as a percentage of sales.
In FY 2020, Elite’s gross profit margin was a negative… (-) 12.4%. In FY 2021, Elite’s gross profit margin was positive… +16.3%. A big swing to the positive.

Finally, we have net profit and this is the sine qua non for determining business effectiveness. It is the difference between a firm's TOTAL REVENUE and all EXPLICIT COSTS.

In FY 2020, Elite had no net profit, it had a loss of $2.240 Million. But in FY 2021, Elite had a positive net profit of $5.088 Million. That is a net swing of $7.32 Million. A BFD!

There is no spin necessary. As a business, Elite is doing fine and the future bodes well. Investors need to know what to look at. Stop looking at the bright shiny objects (like total revenues) and start looking at what a company does with them.