When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Church & Dwight Co., Inc. (NYSE:CHD) as a stock to avoid entirely with its 45.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

While the market has experienced earnings growth lately, Church & Dwight's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Church & Dwight's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 30% overall. 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 21% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.

In light of this, it's understandable that Church & Dwight's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

We've established that Church & Dwight maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Church & Dwight.

If these risks are making you reconsider your opinion on Church & Dwight, explore our interactive list of high quality stocks to get an idea of what else is out there.

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