The price to earnings ratio is one of the most basic and useful measure of a stock when you are trying to fundamentally analyze a company.

The average price to earnings ratio of a company is between 15-22, companies that have a lower ratio are considered to be cheap based off of what they are earning and companies that have a higher ratio are more expensive.

The price to earnings ratio is not the only thing that you should be looking at when you are researching a company.  A company like General Electric should trade at a much lower price to earnings ratio then a company like Apple should because it has much less growth opportunities to expand its business.

To calculate the price to earnings ratio of a company you simply add up what the company has made per share over the last 4 quarters and use that to divide the price. If a company trades at 100 dollars a share and it has made 5 dollars combined over the past 4 quarters than it is trading at a relatively average 20 price to earnings ratio.

If you are considering investing in a company that is geared to grow its business at a rate of 20+% a year, you may want to use a forward price to earnings ratio as your benchmark for analyzing the company. You calculate this ratio the same way except you will add up the estimated profits for the company over the next 4 quarters instead of the actual profits per share the company has made over the past 4 quarters. This is great if you want to look at a long term view of the company.

The price to earnings ratio is very popular because it is a great indicator of how a stock will perform in the long run and also because it is so easy to compute and understand. It is another weapon in your arsenal as far as evaluating companies for long term investments goes.