The Estée Lauder Companies Inc. (NYSE:EL) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 38% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Estée Lauder Companies is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in the United States' Personal Products industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has Estée Lauder Companies Performed Recently?

Estée Lauder Companies hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Estée Lauder Companies' Revenue Growth Trending?

Estée Lauder Companies' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 9.4% decline in revenue over the last three years in total. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 4.3% each year over the next three years. That's shaping up to be similar to the 5.0% each year growth forecast for the broader industry.

With this information, we find it interesting that Estée Lauder Companies is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Estée Lauder Companies' P/S

Despite the recent share price weakness, Estée Lauder Companies' P/S remains higher than most other companies in the industry. 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.

Given Estée Lauder Companies' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Estée Lauder Companies, and understanding these should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.