Man Infraconstruction (NSE:MANINFRA) shares have had a really impressive month, gaining 40%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 31% in the last year.

All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Man Infraconstruction

Does Man Infraconstruction Have A Relatively High Or Low P/E For Its Industry?

Man Infraconstruction's P/E of 31.77 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (13.0) for companies in the construction industry is lower than Man Infraconstruction's P/E.

Man Infraconstruction's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Man Infraconstruction shrunk earnings per share by 66% over the last year. But it has grown its earnings per share by 1.8% per year over the last three years. And EPS is down 12% a year, over the last 5 years. This could justify a pessimistic P/E.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.