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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27546  
Subject: Re: P/E Ratio Date: 10/19/2012 9:51 PM
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They tell you that a typical S&P 500 stock has a PE of 15 or so.

Generally when price earnings ratio is high, it means that investors are willing to bet that a company can increase earnings. As a practical matter, its tough for a company to maintain a very high PE. It requires sustaining impossible growth rates. So for example Jim Cramer won't recommend a stock with a PE over abt 30.

A low PE usually implies that investors think current earnings are not sustainable. Or a very mature, low growth company.

PEG ratio is a way of judging the relationship between PE and growth. The ideal stock should have a PEG ratio of 1.0. Hence the average S&P stock should have a growth rate of 15%/yr. A PE of 30 requires 30% growth per year. A PE of 8, implies an 8% growth rate. 8% is a bit better than inflation, but at 8% you have not much margin for error. Such a company is likely to go out of business over time if it can't do better.
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