Those holding Aditya Birla Money (NSE:BIRLAMONEY) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 10% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 28% 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Aditya Birla Money

How Does Aditya Birla Money's P/E Ratio Compare To Its Peers?

Aditya Birla Money's P/E of 18.86 indicates some degree of optimism towards the stock. As you can see below, Aditya Birla Money has a higher P/E than the average company (15.8) in the capital markets industry.

That means that the market expects Aditya Birla Money will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Aditya Birla Money increased earnings per share by 5.9% last year. And its annual EPS growth rate over 3 years is 144%.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting Aditya Birla Money's P/E?

Net debt totals 61% of Aditya Birla Money's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Aditya Birla Money's P/E Ratio

Aditya Birla Money has a P/E of 18.9. That's higher than the average in its market, which is 13.9. With significant debt and fairly modest EPS growth last year, shareholders are betting on sustained improvement. What is very clear is that the market has become more optimistic about Aditya Birla Money over the last month, with the P/E ratio rising from 14.2 back then to 18.9 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Aditya Birla Money. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.