V2 Retail Limited's (NSE:V2RETAIL) Popularity With Investors Under Threat

With a price-to-earnings (or "P/E") ratio of 17.9x V2 Retail Limited (NSE:V2RETAIL) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at V2 Retail over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for V2 Retail

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 V2 Retail's earnings, revenue and cash flow.

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

V2 Retail's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 57% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 82% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to shrink 1.5% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised earnings results.

With this information, it's strange that V2 Retail is trading at a higher P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On V2 Retail's P/E

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.

We've established that V2 Retail currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 4 warning signs for V2 Retail that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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