Ellington Credit Company's (NYSE:EARN) price-to-earnings (or "P/E") ratio of 23.7x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. 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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Ellington Credit 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ellington Credit

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ellington Credit .

Is There Enough Growth For Ellington Credit?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.9%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 72% per annum over the next three years. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

In light of this, it's understandable that Ellington Credit'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 Bottom Line On Ellington Credit's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Ellington Credit 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Ellington Credit (3 are potentially serious) you should be aware of.

If these risks are making you reconsider your opinion on Ellington Credit, explore our interactive list of high quality stocks to get an idea of what else is out there.

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