What Is Indian Terrain Fashions's (NSE:INDTERRAIN) P/E Ratio After Its Share Price Rocketed?

Indian Terrain Fashions (NSE:INDTERRAIN) shareholders are no doubt pleased to see that the share price has had a great month, posting a 35% gain, recovering from prior weakness. But that will do little to salve the savage burn caused by the 65% share price decline, over the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Indian Terrain Fashions

How Does Indian Terrain Fashions's P/E Ratio Compare To Its Peers?

Indian Terrain Fashions's P/E is 9.52. The image below shows that Indian Terrain Fashions has a P/E ratio that is roughly in line with the luxury industry average (9.3).

Its P/E ratio suggests that Indian Terrain Fashions shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Indian Terrain Fashions shrunk earnings per share by 43% over the last year. And over the longer term (5 years) earnings per share have decreased 4.4% annually. This growth rate might warrant a below average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Indian Terrain Fashions's Debt Impact Its P/E Ratio?

Net debt totals just 2.8% of Indian Terrain Fashions's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On Indian Terrain Fashions's P/E Ratio

Indian Terrain Fashions has a P/E of 9.5. That's below the average in the IN market, which is 10.9. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What we know for sure is that investors are becoming less uncomfortable about Indian Terrain Fashions's prospects, since they have pushed its P/E ratio from 7.1 to 9.5 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Indian Terrain Fashions may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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This article by Simply Wall St is general in nature. 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. Thank you for reading.