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The Aritzia (TSE:ATZ) share price has done well in the last month, posting a gain of 31%. Looking back a bit further, we're also happy to report the stock is up 55% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Aritzia
Does Aritzia Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 30.91 that there is some investor optimism about Aritzia. As you can see below, Aritzia has a higher P/E than the average company (19.8) in the luxury industry.
That means that the market expects Aritzia will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Aritzia increased earnings per share by an impressive 18% over the last twelve months. And it has bolstered its earnings per share by 53% per year over the last five years. With that performance, you might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Aritzia's Balance Sheet Tell Us?
The extra options and safety that comes with Aritzia's CA$21m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.