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The PE ratio of a stock or stock market is typically considered a measure of relative value. Ultimately, it also represents the price at which people are willing to pay today for future growth. The PE ratio is a measure that is capable of identifying stocks that are undervalued and overvalued, and although there is a general rule of thumb is simple evaluation of the PE ratio does not always reveal the true value of the underlying company.
For example, the company may have had a one time events, either positive or negative, that skews the earnings per share for that quarter or year and that one time event could cause the PE and ratio to look larger or smaller than it otherwise should.
How is the Price to Earnings (PE) Ratio Calculated?