To the annoyance of some shareholders, Pareto Bank (OB:PARB) shares are down a considerable 41% in the last month. That drop has capped off a tough year for shareholders, with the share price down 30% 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. 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.

View our latest analysis for Pareto Bank

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

We can tell from its P/E ratio of 4.56 that sentiment around Pareto Bank isn't particularly high. If you look at the image below, you can see Pareto Bank has a lower P/E than the average (6.6) in the banks industry classification.

This suggests that market participants think Pareto Bank will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Pareto Bank maintained roughly steady earnings over the last twelve months. But EPS is up 8.9% over the last 5 years.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

How Does Pareto Bank's Debt Impact Its P/E Ratio?

Net debt totals a substantial 278% of Pareto Bank's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.