Unfortunately for some shareholders, the CTT Systems (STO:CTT) share price has dived 50% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 14% in the last year.

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.

Check out our latest analysis for CTT Systems

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

CTT Systems's P/E is 17.73. The image below shows that CTT Systems has a P/E ratio that is roughly in line with the aerospace & defense industry average (17.7).

That indicates that the market expects CTT Systems will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

CTT Systems increased earnings per share by a whopping 33% last year. And its annual EPS growth rate over 5 years is 131%. With that performance, I would expect it to have an above average P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does CTT Systems's Balance Sheet Tell Us?

The extra options and safety that comes with CTT Systems's kr78m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.