Why Investors Shouldn't Be Surprised By Forval Corporation's (TSE:8275) 25% Share Price Surge

Forval Corporation (TSE:8275) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Forval may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.3x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Forval over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Forval

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Forval will help you shine a light on its historical performance.

How Is Forval's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Pleasingly, EPS has also lifted 47% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Forval's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Forval's P/E

Forval shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Forval maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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 the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Forval that we have uncovered.

You might be able to find a better investment than Forval. 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).

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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.