When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Rattler Midstream LP (NASDAQ:RTLR) as a stock to avoid entirely with its 57.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's inferior to most other companies of late, Rattler Midstream has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, 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.

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Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 86% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

In light of this, it's understandable that Rattler Midstream's 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.

What We Can Learn From Rattler Midstream's P/E?

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.

As we suspected, our examination of Rattler Midstream'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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Rattler Midstream (1 doesn't sit too well with us) you should be aware of.