There is a lack of some confidence in Zoom Video Communications, Inc.’s (NASDAQ:ZM) P/E ratio.

When almost half of the companies in the United States have price-to-earnings (or “P/E”) ratios below 18x, you might think about it Zoom Video Communications, Inc. (NASDAQ:ZM) is a potential stock to avoid with its P/E ratio of 24.2. Still, we’d have to dig a little deeper to determine whether there’s a rational basis for the elevated P/E ratio.

Recent times have been positive for Zoom Video Communications as earnings have increased despite the market’s earnings trending down. It appears many expect the company to continue defying the broader market’s adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’ll be paying a pretty hefty price for no particular reason.

Check out our latest analysis for Zoom Video Communications

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What do growth metrics tell us about the high P/E ratio?

To justify its P/E ratio, Zoom Video Communications would need to deliver impressive above-market growth.

If we first look back, we see that the company grew earnings per share by an impressive 496% over the last year. Still, overall earnings per share are down a whopping 18% compared to three years ago, which is pretty disappointing. Accordingly, shareholders would have been optimistic about medium-term earnings growth rates.

According to analysts covering the company, earnings per share are expected to grow 0.1% per year over the next three years. The rest of the market, on the other hand, is expected to grow by 10% per year, which is much more attractive.

With that in mind, it’s alarming that Zoom Video Communications’ P/E ratio is higher than most other companies. It seems that most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not as confident that this will happen. Only the bravest assume these prices are sustainable, as this level of earnings growth is likely to ultimately weigh heavily on the share price.

The bottom line on Zoom Video Communications’ P/E ratio

We typically caution against reading too much into the price-to-earnings ratio when making investment decisions, even though it can reveal a lot about what other market participants think about the company.

We’ve found that Zoom Video Communications is currently trading at a much higher P/E than expected as its forecast growth is lower than that of the overall market. If we see a weak earnings outlook and growth is slower than the market, we believe the stock price is at risk of falling, which would result in a decline in the high P/E ratio. This puts shareholders’ investments at significant risk and potential investors risk paying an excessive premium.

And what about other risks? Every company has them, and we discovered them 1 Warning sign for Zoom Video Communications you should know that.

Naturally, You might find a fantastic investment by looking at a few good candidates. So take a look free List of companies with a strong growth record and a low P/E ratio.

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