Despite an already strong run, Stealth Group Holdings Ltd (ASX:SGI) shares have been powering on, with a gain of 35% in the last thirty days. The last month tops off a massive increase of 235% in the last year.

Since its price has surged higher, given close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Stealth Group Holdings as a stock to avoid entirely with its 43.3x 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.

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Stealth Group Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Stealth Group Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Stealth Group Holdings.

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 Stealth Group Holdings' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 104%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 550% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.

In light of this, it's understandable that Stealth Group Holdings' 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 Bottom Line On Stealth Group Holdings' P/E

The strong share price surge has got Stealth Group Holdings' P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Stealth Group Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Stealth Group Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're unsure about the strength of Stealth Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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