ISDN Holdings Limited (SGX:I07) shareholders have had their patience rewarded with a 31% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

After such a large jump in price, ISDN Holdings' price-to-earnings (or "P/E") ratio of 21.3x might make it look like a strong sell right now compared to the market in Singapore, where around half of the companies have P/E ratios below 13x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, ISDN Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is ISDN Holdings' Growth Trending?

ISDN Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 70%. However, this wasn't enough as the latest three year period has seen a very unpleasant 67% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 25% each year over the next three years. That's shaping up to be materially higher than the 7.1% each year growth forecast for the broader market.

In light of this, it's understandable that ISDN Holdings' 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 Key Takeaway

Shares in ISDN Holdings have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of ISDN Holdings' 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for ISDN Holdings with six simple checks on some of these key factors.

If you're unsure about the strength of ISDN Holdings' 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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