

P/E Ratio: It's Not A Crystal Ball
What goes up ... well, sometimes it stays up for an awfully long time.
A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. If you aren't familiar with short selling, it's an investing technique by which an investor can make money when a shorted security falls in value. (For more on this, check out the Short Selling tutorial.)
First of all, we believe that novice investors shouldn't be shorting. Secondly, you can get into a lot of trouble by valuing stocks using only simple indicators such as the P/E ratio. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way.
Security analysis requires a great deal more than understanding a few ratios. While the P/E is one part of the puzzle, it's definitely not a crystal ball.



Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
Return On Investment  ROI
A performance measure used to evaluate the efficiency of an investment ... 
Bid Wanted
An announcement by an investor who holds a security that he or ... 
Net Present Value  NPV
The difference between the present value of cash inflows and ... 
Total DebttoCapitalization Ratio
An indicator that measures the total amount of debt in a company’s ... 
PriceToCashFlow Ratio
The ratio of a stock’s price to its cash flow per share. The ...

How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...
Using the PEG, or price/earnings to growth, ratio provides a better picture of a stock's valuation versus simply relying ... 
Is book value a better metric for company worth than the PE ratio?
Determine the best situations in which to utilize book value, P/E ratio and other metrics to determine the true worth of ... 
What is the average pricetoearnings ratio in the drugs sector?
Learn what the average pricetoearnings ratio is for companies operating in the drugs sector and why this metric is important ... 
What is the formula for calculating free cash flow?
Read about some of the formulas for free cash flow, why investors perform cash flow analysis and what a high or rising cash ...