With e.l.f. Beauty, Inc. (NYSE:ELF) It Looks Like You'll Get What You Pay For

e.l.f. Beauty, Inc.'s (NYSE:ELF) price-to-sales (or "P/S") ratio of 12x may look like a poor investment opportunity when you consider close to half the companies in the Personal Products industry in the United States have P/S ratios below 1.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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

How e.l.f. Beauty Has Been Performing

e.l.f. Beauty could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think e.l.f. Beauty's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 79% last year. The latest three year period has also seen an excellent 197% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 35% over the next year. That's shaping up to be materially higher than the 8.2% growth forecast for the broader industry.

With this in mind, it's not hard to understand why e.l.f. Beauty's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into e.l.f. Beauty shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for e.l.f. Beauty that you need to take into consideration.

If these risks are making you reconsider your opinion on e.l.f. Beauty, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.