To the annoyance of some shareholders, Arbonia (VTX:ARBN) shares are down a considerable 33% in the last month. Even longer term holders have taken a real hit with the stock declining 28% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Arbonia

Does Arbonia Have A Relatively High Or Low P/E For Its Industry?

Arbonia's P/E is 20.12. As you can see below Arbonia has a P/E ratio that is fairly close for the average for the building industry, which is 20.0.

That indicates that the market expects Arbonia will perform roughly in line with other companies in its industry. So if Arbonia actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Arbonia shrunk earnings per share by 32% over the last year. But it has grown its earnings per share by 49% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 4.1% annually. This might lead to muted expectations.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.