To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. I propose we take a closer look at the good and the bad at Revlon (NYSE: REV), to see whether the stock is a good value or a potential money pit at just 12 times trailing earnings.

The good
Revlon has rebounded nicely from a very tough 2008. It now finds itself with a growing market presence outside the United States. According to its latest quarterly filing, even with sales slowing in the U.S., almost every international market showed considerable growth, thanks to a good mix of new and core products.

Sales growth would have been flat if not for currency exchange rates. We have to keep in mind that the negative effect of currency exchange rates on revenue is usually short term. Negating these effects, Latin America and Asia showed phenomenal growth ,and could be a main focus of Revlon moving forward.

The bad
We've all heard the story about the straw that broke the camel's back, but in this case, it could be the debt load that crushes Revlon's.

Taking a look at Revlon's closest competitors reveals that while all of them carry a substantial amount of debt, they are all strongly free cash flow-positive, and can therefore use that cash to pay their interest expense while still investing in their businesses:


Total Debt

FCF (trailing 12 months)

FCF as a % of Debt

Revlon $1.22 billion $66.0 million 5%
Estee Lauder (NYSE: EL) $1.24 billion $632 million 51%
Elizabeth Arden (Nasdaq: RDEN) $392.8 million $49 million 12%
Avon Products (NYSE: AVP) $3.12 billion $531 million 17%

Revlon, on the other hand, is dangerously short on cash flow, which could hamper its ability to make payments on its debt in the future, much less expand. In March, Revlon refinanced $800 million in loans, which are now set to mature in March 2015 at a variable interest rate similar to what it had been paying since 2006. So Revlon's borrowing costs have not gone down, even though rates have become much lower for many companies.

The takeaway
Revlon is a household name for many women in the U.S., but the company seems to be stuck in a very vicious debt cycle. I just don't see how it can make a dent into its massive debt pile unless its cash flow grows two- to threefold. With the only negative book value among those four listed above (due to its debt), I don't think even a high single-digit price-to-earnings ratio could attract me to take a risk on Revlon. Folks, I'd leave this one on the shelf.

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that doesn't need any makeup to look pretty.