The price-to earnings ratio, more commonly referred to as a P/E ratio, is one of the most important and popular criteria that investors use in order to determine a stocks true value. The P/E ratio is frequently the very first criteria that an investor will look at when evaluating a stock.

Criteria Defined

The P/E ratio is a measure of a company's stock price against its historical or projected earnings, and is calculated by dividing these two numbers. For example, if company XYZ's share price is $50, and over the last 4 quarters, it has posted earnings of $5.00 per share, you calculate the P/E ratio by dividing these two numbers, as seen in this simple formula below.

$50/$5.00=10X

This company is currently carrying a P/E multiple of 10X. Which means that its stock price is trading at ten times last year's earnings per share.

How To Use

Zacks Custom Screener, which is totally free, carries P/E filters that enable an investor to establish limits for P/E multiples. If you take a look at the "screen-shot" below, you can see that I have established a P/E parameter of less than 15, which means I only want my screen to show me stocks that carry a reading lower than the designated value. This is a very simple and effective way to identify stocks with the desired valuations.

Improving Your Screening Results

In order to provide more texture to a company's P/E ratio, it can be useful to make comparisons between industry competitors, or the overall market, in order to identify the most attractive opportunities. The Zacks Research Wizard has many additional functionalities for evaluating P/E ratios.

The S&P 500 is frequently used as a P/E benchmark that investors use to gauge an individual company's P/E ratio. If the average P/E of the S&P 500 is 16X, and company XYZ is trading at 12X, the assumption is that the issue is currently trading at a discount to the market.

On the other side of that paradigm would be a company with a P/E ratio of 20X. The conclusion in this instance is that this company's stock is trading at a premium to the market and may be overvalued based upon historical earnings.

Below is a screen-shot of the Research Wizard category covering P/E metrics. As you can see, there are many different categories and classifications that can be used to filter for desired P/E multiples.

The Zacks Research Wizard enables the investor to drill deeper into the P/E ratio in order gain valuable insights and information that can lead to long-term, sustainable results.

Conclusion

The P/E ratio is a very simple yet powerful tool. It is a metric that is used to determine the value of a company's stock price relative to its earnings. Zacks provides a number of tools in order to incorporate this data metric into an investment strategy, the totally free Custom Screener and the premium Research Wizard. Using these powerful tools can help any kind of investor identify attractive stocks that will help boost gains.

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