When it comes to valuing stocks, the price-to-earnings (P/E) ratio is the number one metric for investors that want an instant fix on what the market thinks of a company. But while the beloved P/E can tell you a lot about a share price there are health warnings to heed if you don’t want to be left exposed by its limitations.What is the P/E ratio?The price/earnings, P/E or ‘multiple’ as it is sometimes called compares a company’s stock price with its historic EPS, or earnings per share (which you’ll find on many websites or ideally in the company’s Pamp;L statement). It is effectively a shorthand for how expensive or cheap a share is compared with its profits. Alternatively, it can be calculated by dividing the company’s market capitalisation by its total annual earnings. As an example, online fashion retailer ASOS (LON:ASC) last year delivered a normalised EPS of 25.6p and saw its shares close on January 23rd at 1757p. By dividing those figures you arrive at a current P/E of 68. By comparison, stalwart high street retailer Marks And Spencer (LON:MKS) trades on…
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