To the annoyance of some shareholders, National Security Group (NASDAQ:NSEC) shares are down a considerable in the last month. Looking back further, the stock is up 9.8% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. 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.

See our latest analysis for National Security Group

How Does National Security Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 8.53 that sentiment around National Security Group isn't particularly high. If you look at the image below, you can see National Security Group has a lower P/E than the average (11.0) in the insurance industry classification.

National Security Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with National Security Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

National Security Group's earnings made like a rocket, taking off 422% last year. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 9.8%. Unfortunately, earnings per share are down 12% a year, over 5 years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.