Pro-Dex, Inc. (NASDAQ:PDEX) shares have continued their recent momentum with a 31% gain in the last month alone. The last month tops off a massive increase of 129% in the last year.

Following the firm bounce in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Pro-Dex as a stock to potentially avoid with its 25.9x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Pro-Dex has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Pro-Dex will help you uncover what's on the horizon.

Is There Enough Growth For Pro-Dex?

The only time you'd be truly comfortable seeing a P/E as high as Pro-Dex's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.7% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 5.2% during the coming year according to the only analyst following the company. With the market predicted to deliver 15% growth , that's a disappointing outcome.

In light of this, it's alarming that Pro-Dex's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Pro-Dex's P/E

The large bounce in Pro-Dex's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Pro-Dex currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Pro-Dex that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.