Optimistic Investors Push Celebrity Fashions Limited (NSE:CELEBRITY) Shares Up 27% But Growth Is Lacking

Celebrity Fashions Limited (NSE:CELEBRITY) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 34%.

In spite of the firm bounce in price, there still wouldn't be many who think Celebrity Fashions' price-to-earnings (or "P/E") ratio of 32.3x is worth a mention when the median P/E in India is similar at about 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Celebrity Fashions' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Celebrity Fashions

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Celebrity Fashions' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Celebrity Fashions would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Celebrity Fashions is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Celebrity Fashions' P/E

Its shares have lifted substantially and now Celebrity Fashions' P/E is also back up to the market median. 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.

Our examination of Celebrity Fashions revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Celebrity Fashions is showing 5 warning signs in our investment analysis, and 2 of those are a bit concerning.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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