Unfortunately for some shareholders, the Enphase Energy, Inc. (NASDAQ:ENPH) share price has dived 29% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 71% loss during that time.

Although its price has dipped substantially, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may still consider Enphase Energy as a stock to potentially avoid with its 22.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, Enphase Energy has been doing relatively well. 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 Enphase Energy

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

Is There Enough Growth For Enphase Energy?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. Still, incredibly EPS has fallen 11% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 7.9% per annum over the next three years. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.

With this information, we find it concerning that Enphase Energy is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Enphase Energy's P/E

Despite the recent share price weakness, Enphase Energy's P/E remains higher than most other companies. 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.

Our examination of Enphase Energy's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.