Aritzia Inc.'s (TSE:ATZ) 25% Cheaper Price Remains In Tune With Earnings

The Aritzia Inc. (TSE:ATZ) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 48%, which is great even in a bull market.

In spite of the heavy fall in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 14x, you may still consider Aritzia as a stock to avoid entirely with its 45.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Aritzia as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Aritzia

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

Is There Enough Growth For Aritzia?

The only time you'd be truly comfortable seeing a P/E as steep as Aritzia's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. Still, incredibly EPS has fallen 7.6% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 94% as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 20%, which is noticeably less attractive.

In light of this, it's understandable that Aritzia's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Aritzia's P/E?

A significant share price dive has done very little to deflate Aritzia's very lofty P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Aritzia's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Aritzia you should know about.

You might be able to find a better investment than Aritzia. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.