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P/E Ratio Help

BenHouston said: "I am new to investing in the stock market, and I know many of you are seasoned investors or maybe even professionals. Anyways, when I look at a stock I know that the P/E ratio is price of stock / earnins per share, now is it good for a company to have a higher EPS or a lower? A company like GOOG with a P/E ratio of 88.50 seems like the stock is way over priced if you ask me, we are paying 88.50 for every dollar google makes. Then of course there are many stocks that don't have a P/E ratio due to them making no money, or having a negative EPS. Anyways, if you guys could explain, what I should be looking for when I screen for companies I'd be very greatful. Thanks in advance, Ben :)"

LanceJ said: "[QUOTE=BenHouston] Anyways, when I look at a stock I know that the P/E ratio is price of stock / earnins per share, now is it good for a company to have a higher EPS or a lower?[/QUOTE] Company ABC is trading at $20 per share. The EPS is $1.00 per share. The P/E is 20. Company DEF is trading at $20 per share. The EPS is $2.00 per share. The P/E is 10. Company DEF with a higher EPS (EPS = higher always better) has a lower P/E (generally, lower P/E ratio is better but a company could have a P/E that is too low and that could be indicative of other problems, but we wouldn't go there and don't ask me). So when it comes to EPS, higher is better. When it comes to P/E lower is better. The average P/E for Googles sector, which is Technology, Internet Information Providers, is 52.2. Therefore GOOG seems slightly overvalued with a P/E of 88.5 that is among the highest in the industry. But investors are willing to pay a little more in anticipation of future EPS growth."

BenHouston said: "Thanks Lance"

Liviu said: "Google is insanely overpriced IMO. Can they really grow earnings at a rate fast enough to justify a P/E of 87?"

LanceJ said: "Check out this prophesitic article when everyone was debating if Google was overvalued back in Sept.2004 at $119. Google Shares Hit Another High Note [url]http://www.thestreet.com/_yahoo/tech/georgemannes/10183671.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA[/url] "We expect the Google stock to have a higher beta than Yahoo! Yahoo! has a 1.5 to 1.7 depending on which source you want to quote," says Laura Martin of Soleil/Media Metrics, referring a ratio that describes how widely a stock's value can be expected to fluctuate relative to its peers. "So Google's stock price can be expected to be very volatile, both up and down, compared to the market." In any event, I don't own any Google, never have, and probably never will for a major disagreement I had with their "Computer Geeks R Us We have No Actual Business Sense" advertising department a couple of years ago. So I don't have an opinion on Google and their current valuation if that's what you are looking for. Suffice to say if I thought they were a good buy, I would have put it in the Sticky Six Portfolio."

HappyHarry said: "Don't forget one thing though. Forward P/E is a lot more informative than trailing P/E. Companies with high growth rates will almost always have high P/Es, but these are the companies that usually return the highest profits."