When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider XP Inc. (NASDAQ:XP) as a stock to potentially avoid with its 18.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate XP's and the market's retreating earnings lately. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for XP

How Is XP's Growth Trending?

In order to justify its P/E ratio, XP would need to produce impressive growth in excess of the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Although pleasingly EPS has lifted 94% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the nine analysts following the company. With the market only predicted to deliver 10%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that XP's 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 Final Word

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 XP's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these 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 XP 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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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.