Unfortunately for some shareholders, the Rheinmetall (ETR:RHM) share price has dived 54% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 55% drop over twelve months.

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 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 Rheinmetall

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

Rheinmetall's P/E of 6.11 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Rheinmetall has a lower P/E than the average (11.3) in the industrials industry classification.

Its relatively low P/E ratio indicates that Rheinmetall shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Rheinmetall, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

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 even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Rheinmetall increased earnings per share by an impressive 13% over the last twelve months. And it has bolstered its earnings per share by 41% per year over the last five years. This could arguably justify a relatively high P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.