Unfortunately for some shareholders, the Huhtamäki Oyj (HEL:HUH1V) share price has dived 44% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 27% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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 Huhtamäki Oyj

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

Huhtamäki Oyj's P/E is 13.31. You can see in the image below that the average P/E (13.0) for companies in the packaging industry is roughly the same as Huhtamäki Oyj's P/E.

That indicates that the market expects Huhtamäki Oyj will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.

Huhtamäki Oyj increased earnings per share by an impressive 22% over the last twelve months. And it has bolstered its earnings per share by 8.0% per year over the last five years. This could arguably justify a relatively high P/E ratio.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.