When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider Volex plc (LON:VLX) as a stock to potentially avoid with its 24.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Volex certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Volex

Although there are no analyst estimates available for Volex, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Volex's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

In contrast to the company, the rest of the market is expected to decline by 2.5% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's understandable that Volex's P/E sits above the majority of other companies. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Volex revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.