Go Fashion (India) Limited (NSE:GOCOLORS) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely
Unfortunately for some shareholders, the Go Fashion (India) Limited (NSE:GOCOLORS) share price has dived 26% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.
Although its price has dipped substantially, Go Fashion (India) may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 28.3x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x 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.
With earnings growth that's inferior to most other companies of late, Go Fashion (India) has been relatively sluggish. 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.
See our latest analysis for Go Fashion (India)
Is There Enough Growth For Go Fashion (India)?
The only time you'd be truly comfortable seeing a P/E as high as Go Fashion (India)'s is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a worthy increase of 2.9%. The latest three year period has also seen a 14% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 13% per year over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's alarming that Go Fashion (India)'s 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.
The Bottom Line On Go Fashion (India)'s P/E
Despite the recent share price weakness, Go Fashion (India)'s P/E remains higher than most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Go Fashion (India) currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. 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 Go Fashion (India) 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.