The P/E ratio is simple to calculate and probably the most consistent red flag to excessive optimism and overinvestment. It also serves, regularly as a marker of business problems and opportunities. To calculate this ratio, divide market price per share by earnings per share of a stock. For example, if ABC Toy Companies common stock sold at $15 per share at the end of the year and it earned $1.32 a share for that year, the end-of-year PE ratio would be 11.4 (15 ÷ 1.32).
Different industries usually have different P/E ratio averages, so keep that fact in mind when doing your analysis. For example:
• Slower-growth companies (e.g., metals, oil) usually have low P/E ratios. A ratio of 8 to 10 might be normal for them.
• A high-growth company (e.g., technology, bio tech) may have a ratio of 20 or more.
Local and national trade associations gather data and publish standard and average ratios for their trade or industry. This data is usually available for free and can be a good guideline for individual investors. Check the internet.