The Alibaba Group Holding Limited (NYSE:BABA) share price has done very well over the last month, posting an excellent gain of 49%. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

After such a large jump in price, Alibaba Group Holding may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.3x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Alibaba Group Holding hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Alibaba Group Holding

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

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

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the analysts watching the company. With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Alibaba Group Holding 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.

The Bottom Line On Alibaba Group Holding's P/E

The large bounce in Alibaba Group Holding's shares has lifted the company's P/E to a fairly high level. 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 Alibaba Group Holding's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Alibaba Group Holding that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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