With a price-to-earnings (or "P/E") ratio of 22.4x Sanmina Corporation (NASDAQ:SANM) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x 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 as high as it is.

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Recent times haven't been advantageous for Sanmina as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Sanmina

Keen to find out how analysts think Sanmina's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Sanmina's Growth Trending?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 13% overall rise in EPS. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% during the coming year according to the two analysts following the company. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.

With this information, we can see why Sanmina is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Sanmina's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Sanmina'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Sanmina with six simple checks.

If you're unsure about the strength of Sanmina's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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