After Leaping 28% e.l.f. Beauty, Inc. (NYSE:ELF) Shares Are Not Flying Under The Radar

e.l.f. Beauty, Inc. (NYSE:ELF) shareholders have had their patience rewarded with a 28% share price jump in the last month. The annual gain comes to 173% following the latest surge, making investors sit up and take notice.

After such a large jump in price, e.l.f. Beauty may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 65.5x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

e.l.f. Beauty certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for e.l.f. Beauty

Want the full picture on analyst estimates for the company? Then our free report on e.l.f. Beauty will help you uncover what's on the horizon.

Is There Enough Growth For e.l.f. Beauty?

The only time you'd be truly comfortable seeing a P/E as steep as e.l.f. Beauty's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 245%. The latest three year period has also seen an excellent 1,018% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 21% each year over the next three years. That's shaping up to be materially higher than the 12% per year growth forecast for the broader market.

With this information, we can see why e.l.f. Beauty is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shares in e.l.f. Beauty have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that e.l.f. Beauty maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for e.l.f. Beauty you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.