The Monolithic Power Systems, Inc. (NASDAQ:MPWR) share price has fared very poorly over the last month, falling by a substantial 31%. Still, a bad month hasn't completely ruined the past year with the stock gaining 28%, which is great even in a bull market.

In spite of the heavy fall in price, Monolithic Power Systems may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 72.7x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Monolithic Power Systems could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Monolithic Power Systems' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 91% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 29% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 10% per annum, which is noticeably less attractive.

In light of this, it's understandable that Monolithic Power Systems' 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

A significant share price dive has done very little to deflate Monolithic Power Systems' very lofty P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Monolithic Power Systems maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Monolithic Power Systems you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.