Indiabulls Real Estate (NSE:IBREALEST) shareholders are no doubt pleased to see that the share price has bounced 77% in the last month alone, although it is still down 7.7% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% in the last year.

All else being equal, a sharp share price increase should make a stock less 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 deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Indiabulls Real Estate

Does Indiabulls Real Estate Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.69 that sentiment around Indiabulls Real Estate isn't particularly high. If you look at the image below, you can see Indiabulls Real Estate has a lower P/E than the average (13.9) in the real estate industry classification.

This suggests that market participants think Indiabulls Real Estate will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Indiabulls Real Estate saw earnings per share decrease by 75% last year. But over the longer term (5 years) earnings per share have increased by 26%.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.