The PE Ratio often used to determine if a company is under or overvalued. The brief technical definition for the PE (Price to Earnings) Ratio is that it relates a company's share price to its earnings per share. Another way of looking at it is, the PE Ratio determines how much money it could potentially cost an investor for every $1 of company profit.
PE Ratio = Current Price / Earnings Per Share
Why is it Important?
PE ratios are a good way to gauge market expectations. Higher PE Ratios are generally given to high-growth companies. Lower PE Ratios are more appropriate for stable and reasonable growth companies. Companies that have business issues or limited growth prospect tend to have the lowest PE Ratios.