The cornerstone to valuing stocks: The P/E ratio

Let's say that a company's stock trades for $100 and that the company has earnings per share (EPS) of $6.50 over the last 12 months. 

We can calculate a trailing ("last 12 months") P/E ratio for that stock by simply dividing the stock price ("P") by the EPS ("E"), so 100/6.50 equals about 1...

Growth investors often use the P/E ratio as a building block for finding two other metrics: the forward P/E and the PEG ratios.

• The forward P/E is calculated by dividing the stock price by the company's expected future earnings. 
• The PEG ratio is calculated by dividing the comp...

Unfortunately, there's no P/E ratio set in stone that makes a stock a buy if it's below, or a sell if it's above.

Often value investors and growth investors will look for different things in a P/E ratio. 

• Value Investors - the lower the P/E ratio the better.
• Growth Inves...