The price-earnings ratio, which is also known as the p/e ratio for short is a useful metric for evaluating the relative attractiveness of a company's stock price compared to the current earnings of a firm.
Different industries have different P/E ratios and this should be factored in when considering an investment.
Remember, just because a stock is cheap doesn't mean you should buy it. Many investors prefer the PEG Ratio, instead, because it factors in the growth rate. Even better is the dividend-adjusted PEG ratio because it takes the basic price-to-earnings ratio and adjusts it for both the growth rate and the dividend yield of the stock.
If you are tempted to buy a stock because the p/e ratio appears attractive, do your research and discover the reasons. Is management honest? Is the business losing key customers?
Is it simply a case of neglect, as happens from time to time even with fantastic businesses? Is the weakness in the stock price or underlying financial performance a result of forces across the entire sector, industry, or economy, or is it caused by firm-specific bad news? Is the company going into a permanent state of decline?