Unfortunately for some shareholders, the ICT Group (AMS:ICT) share price has dived 54% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 57% in that time.

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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for ICT Group

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

ICT Group's P/E of 20.22 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (25.7) for companies in the software industry is higher than ICT Group's P/E.

Its relatively low P/E ratio indicates that ICT Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with ICT Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

ICT Group's earnings per share fell by 72% in the last twelve months. And it has shrunk its earnings per share by 21% per year over the last five years. This could justify a pessimistic P/E.

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. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.