Xunlei Limited (NASDAQ:XNET) shares have continued their recent momentum with a 52% gain in the last month alone. The last month tops off a massive increase of 201% in the last year.

Since its price has surged higher, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Xunlei as a stock to potentially avoid with its 21.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Xunlei as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Xunlei

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

How Is Xunlei's Growth Trending?

Xunlei's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 147%. The strong recent performance means it was also able to grow EPS by 141% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 14% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Xunlei's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Xunlei's P/E?

The large bounce in Xunlei's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Xunlei revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Xunlei you should be aware of.

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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