Price Earnings ratio is a measure of market valuation
(capitalization) and is a ratio between the price per share to the
earnings per share. Price Earnings ratio is affected by a number of
factors- the growth rate of the company, expectations of future
growth rate , earnings- both retained and dividends paid out, other
risk factors, economic conditions etc. Generally, young growing
firms with multitude of growth opportunities tend to have a higher
P/E. The market lets fast growing companies (tech) usually have a
higher p/e ratio. due to the fact that the market perceives the
company that is growing fast, will have increased earnings in the
future. For example if a company is a trading at $1 per share, and
has earnings of a dime per share. Then the company's p/e ratio is
10. As a rule anything (p/e ratio) under 20 is good and over 20 is
getting expensive. Value stocks have a low p/e ratio. but maybe
grow at a slower pace than a tech. firm where p/e ratio of 30 to 40
is more common.