To the annoyance of some shareholders, technotrans (ETR:TTR1) shares are down a considerable 39% in the last month. That drop has capped off a tough year for shareholders, with the share price down 60% in that time.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for technotrans

How Does technotrans's P/E Ratio Compare To Its Peers?

technotrans's P/E of 13.00 indicates some degree of optimism towards the stock. As you can see below, technotrans has a higher P/E than the average company (11.1) in the machinery industry.

Its relatively high P/E ratio indicates that technotrans shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

technotrans shrunk earnings per share by 51% over the last year. But over the longer term (5 years) earnings per share have increased by 5.5%. And over the longer term (3 years) earnings per share have decreased 6.9% annually. This might lead to low expectations.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).