When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Ecofibre Limited (ASX:EOF) as a stock to avoid entirely with its 55.1x 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.

Ecofibre certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Ecofibre?

In order to justify its P/E ratio, Ecofibre would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 93%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 42% each year during the coming three years according to the one analyst following the company. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

With this information, we can see why Ecofibre 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 Ecofibre's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Ecofibre's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You need to take note of risks, for example - Ecofibre has 4 warning signs (and 1 which is significant) we think you should know about.