Earnings Tell The Story For e.l.f. Beauty, Inc. (NYSE:ELF) As Its Stock Soars 48%

e.l.f. Beauty, Inc. (NYSE:ELF) shares have had a really impressive month, gaining 48% after a shaky period beforehand. But the last month did very little to improve the 56% share price decline over the last year.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider e.l.f. Beauty as a stock to avoid entirely with its 48.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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e.l.f. Beauty hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

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Does Growth Match The High P/E?

In order to justify its P/E ratio, e.l.f. Beauty would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 337% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 47% as estimated by the analysts watching the company. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that e.l.f. Beauty's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

e.l.f. Beauty's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for e.l.f. Beauty that you need to be mindful of.

If you're unsure about the strength of e.l.f. Beauty's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.