When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider IDEXX Laboratories, Inc. (NASDAQ:IDXX) as a stock to avoid entirely with its 41.9x 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.

Recent earnings growth for IDEXX Laboratories has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Want the full picture on analyst estimates for the company? Then our free report on IDEXX Laboratories will help you uncover what's on the horizon.

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

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

Retrospectively, the last year delivered a decent 5.8% gain to the company's bottom line. EPS has also lifted 25% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 twelve analysts covering the company suggest earnings should grow by 12% each year over the next three years. That's shaping up to be similar to the 11% per year growth forecast for the broader market.

With this information, we find it interesting that IDEXX Laboratories is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of IDEXX Laboratories' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for IDEXX Laboratories that you need to take into consideration.

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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