After Leaping 34% Aritzia Inc. (TSE:ATZ) Shares Are Not Flying Under The Radar

Aritzia Inc. (TSE:ATZ) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

Following the firm bounce in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may consider Aritzia as a stock to avoid entirely with its 31.1x 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.

We've discovered 1 warning sign about Aritzia. View them for free.

Aritzia certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Aritzia

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aritzia.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Aritzia's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 150% last year. EPS has also lifted 28% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 15% per year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% each year, which is noticeably less attractive.

With this information, we can see why Aritzia 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 Bottom Line On Aritzia's P/E

Aritzia's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Aritzia's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Aritzia that 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).

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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.