After Leaping 27% Round One Corporation (TSE:4680) Shares Are Not Flying Under The Radar

Those holding Round One Corporation (TSE:4680) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 68% in the last year.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Round One as a stock to potentially avoid with its 18.3x P/E ratio. 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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Round One could be doing better as it's been growing earnings less than most other companies lately. 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.

View our latest analysis for Round One

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

Does Growth Match The High P/E?

Round One'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, we see that the company managed to grow earnings per share by a handy 3.0% last year. This was backed up an excellent period prior to see EPS up by 337% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 15% each year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 8.9% each year growth forecast for the broader market.

In light of this, it's understandable that Round One'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 Round One's P/E

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

As we suspected, our examination of Round One's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You always need to take note of risks, for example - Round One has 1 warning sign we think you should be aware of.

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.