Serverworks Co.,Ltd. (TSE:4434) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

Those holding Serverworks Co.,Ltd. (TSE:4434) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider ServerworksLtd as a stock to avoid entirely with its 26.4x 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.

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Recent times haven't been advantageous for ServerworksLtd as its earnings have been rising slower than most other companies. 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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Is There Enough Growth For ServerworksLtd?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.7% last year. The latest three year period has also seen an excellent 50% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 21% per annum as estimated by the one analyst watching the company. With the market only predicted to deliver 9.8% each year, the company is positioned for a stronger earnings result.

With this information, we can see why ServerworksLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

ServerworksLtd's P/E is flying high just like its stock has during the last month. 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 ServerworksLtd 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 1 warning sign for ServerworksLtd that you should be aware of.

If these risks are making you reconsider your opinion on ServerworksLtd, 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.