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Many analysts and stock traders look at the price earnings ratio of stocks to judge value when buying. The PE Ratio is calculated by dividing the current market price by it's earnings per share. This is also known as a stock's multiple.
When the raio is higher, it can indicate that a security is over priced, relative to other stocks in it's industry. While this should not be the only investment indicator a stock investor should look at, it is a true number - combining the real market price and the real earnings on a per share basis.
Multiple
When someone says "We are only interested in stocks with low multiples....", they are focused on the Price Earnings Ratio. A company that is trading at $65 and has an EPS of $1.40, has an approximate PE of 46:1. This may or may not be a good ratio for a particular company. Some industries and sectors have historic low or high PE's.
In the end, investors should judge these ratios vs. companies in similar industries or type. A technology stock should not be measured against a utility company only on a PE Ratio basis.
Copyright  2006 American Investment Training, Inc.
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