Earnings Tell The Story For Aritzia Inc. (TSE:ATZ) As Its Stock Soars 35%

Despite an already strong run, Aritzia Inc. (TSE:ATZ) shares have been powering on, with a gain of 35% in the last thirty days. The last 30 days bring the annual gain to a very sharp 95%.

Since its price has surged higher, 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 68x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's superior to most other companies of late, Aritzia has been doing relatively well. 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

Want the full picture on analyst estimates for the company? Then our free report on Aritzia will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Aritzia would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 21% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 90% over the next year. Meanwhile, the rest of the market is forecast to only expand by 22%, which is noticeably less attractive.

In light of this, it's understandable that Aritzia's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

The strong share price surge has got Aritzia's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings 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. 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 1 warning sign for Aritzia that you need to take into consideration.

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.