Vedant Fashions Limited's (NSE:MANYAVAR) Business Is Trailing The Market But Its Shares Aren't

Vedant Fashions Limited's (NSE:MANYAVAR) price-to-earnings (or "P/E") ratio of 72.5x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 22x and even P/E's below 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Vedant Fashions certainly has been doing a good job lately as it's been growing earnings more 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.

Check out our latest analysis for Vedant Fashions

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How Is Vedant Fashions' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 37%. Pleasingly, EPS has also lifted 87% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is noticeably more attractive.

In light of this, it's alarming that Vedant Fashions' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Vedant Fashions' P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Vedant Fashions' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Vedant Fashions is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Vedant Fashions. 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.