Taken from p. 143 of Active Value Investing, the classic book from Vitaliy N. Katsenelson.
P/E (price per earning) refers to the amount of money stock investors
are willing to pay for the stock as reflected in its stock price. First,
determine how much the company is earning per share. Then check the
stock price. Divide the current stock price by the earnings per share
number. You have the P/E ratio!
So is a high P/E a good or bad sign? Depends.
A new growth stock will typically show much higher P/E ratios than an
established company. Once a company stops growing rapidly, the P/E ratio
will actually decline.
Katsenelson quotes the legendary Benjamin Graham as giving a P/E figure
of around 8 as about right for a company with solid fundamentals but low
Katsenelson includes a cool chart on p.143 that shows appropriate levels of P/E in relation to expected levels of growth.