DXP Enterprises, Inc. (NASDAQ:DXPE) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 72%.

After such a large jump in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider DXP Enterprises as a stock to potentially avoid with its 20.5x 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 as high as it is.

DXP Enterprises 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think DXP Enterprises' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For DXP Enterprises?

There's an inherent assumption that a company should outperform the market for P/E ratios like DXP Enterprises' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.0% last year. The latest three year period has also seen an excellent 418% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 19% over the next year. That's shaping up to be materially higher than the 13% growth forecast for the broader market.

With this information, we can see why DXP Enterprises is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in DXP Enterprises' 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 DXP Enterprises' 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.

Having said that, be aware DXP Enterprises is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.