Price Per Earnings Ratio (P/E)
The price per earnings ratio (P/E) can be very helpful in judging the valuation (how cheap a stock price is).
Basically, what the P/E tells you is how many years worth of current earnings it would take for the company to earn your share price. PE ratio = Share Price/Earnings per share (EPS). If the share price is $10 for a company making 50 cents per share, its P/E ration would be 20.
It depends upon the growth rate of a company. If their earnings are steady, 10-12 EPS is acceptable. If they are growing, 15-20 is acceptable. Any company with a large growth rate can warrant up to 40+. Google currently has a 38 P/E ratio because they are expected to grow their EPS about 25% this year.
There is no exact formula showing what a fair P/E ratio is, but this seems to work well.