With a price-to-earnings (or "P/E") ratio of 26.1x Juniper Networks, Inc. (NYSE:JNPR) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Juniper Networks as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Juniper Networks

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

In order to justify its P/E ratio, Juniper Networks would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. The last three years don't look nice either as the company has shrunk EPS by 3.5% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% each year over the next three years. That's shaping up to be materially higher than the 12% per year growth forecast for the broader market.

In light of this, it's understandable that Juniper Networks' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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.

We've established that Juniper Networks maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Juniper Networks that we have uncovered.

Of course, you might also be able to find a better stock than Juniper Networks. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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