Dividend Chaser on Price to Earnings Ratio

(From Article)

By comparing price and earnings per share for a company, one can analyze the market's stock valuation of a company and its shares relative to the income the company is actually generating. 

Stocks with higher (or more certain) forecastearnings growth will usually have a higher P–E, and those expected to have lower (or riskier) earnings growth will usually have a lower P–E. 

Investors can use the P–E ratio to compare the value of stocks: if one stock has a P–E twice that of another stock, all things being equal (especially the earnings growth rate), it is a less attractive investment.

Companies are rarely equal, however, and comparisons between industries, companies, and time periods may be misleading. 

P–E ratio in general is useful for comparing valuation of peer companies in similar sector or group.

Various interpretations of a particular P–E ratio are possible, and the historical table below is just indicative and cannot be a guide, as current P–E ratios should be compared to current real interest rates (seeFed model):

N/A	A company with no earnings has an undefined P–E ratio. By convention, companies with losses (negative earnings) are usually treated as having an undefined P–E ratio, even though a negative P–E ratio can be mathematically determined.
0–10	Either the stock is undervalued or the company's earnings are thought to be in decline. Alternatively, current earnings may be substantially above historic trends or the company may have profited from selling assets.
10–17	For many companies a P–E ratio in this range may be considered fair value.
17–25	Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published. The stock may also be a growth stock with earnings expected to increase substantially in the future.
25+	A company whose shares have a very high P/E may have high expected future growth in earnings, or this year's earnings may be considered to be exceptionally low, or the stock may be the subject of a speculative bubble.