It's really great to see that even after a strong run, Cupid (NSE:CUPID) shares have been powering on, with a gain of 33% in the last thirty days. Unfortunately, the full year gain of 3.2% wasn't so sweet.

Assuming no other changes, a sharply higher share price makes a stock less 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Cupid

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

We can tell from its P/E ratio of 12.72 that sentiment around Cupid isn't particularly high. The image below shows that Cupid has a lower P/E than the average (32.4) P/E for companies in the personal products industry.

This suggests that market participants think Cupid will underperform other companies in its industry. Since the market seems unimpressed with Cupid, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Cupid saw earnings per share improve by -9.5% last year. And it has bolstered its earnings per share by 225% per year over the last five years.

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. Thus, the metric does not reflect cash or debt held by the company. 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).

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.