Vedant Fashions Limited's (NSE:MANYAVAR) Shares May Have Run Too Fast Too Soon

Vedant Fashions Limited's (NSE:MANYAVAR) price-to-earnings (or "P/E") ratio of 43.4x 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 28x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's inferior to most other companies of late, Vedant Fashions has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Vedant Fashions

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

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.

Retrospectively, the last year delivered a decent 3.0% gain to the company's bottom line. EPS has also lifted 6.8% in aggregate from three years ago, partly 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.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

With this information, we find it concerning that Vedant Fashions is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Key Takeaway

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.

We've established that Vedant Fashions currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Vedant Fashions with six simple checks will allow you to discover any risks that could be an issue.

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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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.