Vedant Fashions Limited's (NSE:MANYAVAR) Stock Retreats 27% But Earnings Haven't Escaped The Attention Of Investors

Unfortunately for some shareholders, the Vedant Fashions Limited (NSE:MANYAVAR) share price has dived 27% in the last thirty days, prolonging recent pain. Longer-term shareholders would now have taken a real hit with the stock declining 2.9% in the last year.

In spite of the heavy fall in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Vedant Fashions as a stock to avoid entirely with its 56.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Vedant Fashions as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Vedant Fashions

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

Vedant Fashions' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 64% overall rise in EPS, in spite of its uninspiring short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Vedant Fashions is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

A significant share price dive has done very little to deflate Vedant Fashions' very lofty 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.

We've established that Vedant Fashions maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Vedant Fashions with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.