Also known as the P/E multiple, this is the latest closing price divided by the latest 12 months' earnings per share. P/E is perhaps the single most widely used factor in assessing whether a stock is pricey or cheap. A company's P/E should be looked at against those of similar companies, and against that of the stock market as a whole, since different industries and even different companies are characterized by markedly different P/Es. In general, fast-growing technology companies have high P/Es, since the stock price is taking account of anticipated growth as well as current earnings. High-tech companies often trade at P/Es above 40, or about double the overall market P/E. Banks, on the other hand, typically have below-market P/E ratios.
A high P/E is often a reflection of lofty expectations for a stock, since no one would invest knowing it would take 40 years just to make one's money back. The idea is that earnings will grow. A high P/E can also reflect poor recent earnings. A low P/E can imply low investor expectations, an undervalued stock, or both.
Some investors like to compare P/E to the growth of earnings per share. The resulting PEG ratio (P/E divided by growth rate) gives some idea of whether investor expectations are reasonable given past performance. Value investors sometimes say that a PEG ratio of less than one means a stock is cheap.