Rorze Corporation (TSE:6323) Looks Just Right With A 28% Price Jump

Rorze Corporation (TSE:6323) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Since its price has surged higher, Rorze's price-to-earnings (or "P/E") ratio of 20.1x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Rorze could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Rorze

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

What Are Growth Metrics Telling Us About The High P/E?

Rorze's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 19%. Still, the latest three year period has seen an excellent 31% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% each year, which is noticeably less attractive.

In light of this, it's understandable that Rorze'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 Rorze's P/E?

Rorze's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Rorze maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Rorze that we have uncovered.

You might be able to find a better investment than Rorze. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).