If the Price of the stock is higher than the amount earned by the company, why is this a risk?

Does this tend to happen with high growth stocks?

How can one decide whether the P is excessively high?

If you guys have anything to add about the P/E ratio in regards to its importance when analyzing a stock price would be excellent.

Thanks in advance.

 

Honestly? I means almost nothing by itself. If a company's P/E is much higher or lower than its peers in the same industry, it can be a signal -- but just one signal among many. If you trade solely on P/E you will rarely make any money.

- Warren

 

define risk. Risk of the share price falling? Risk of the share price not rising? Risk of the company going bankrupt?

A high P/E can actually be a great reason to buy a stock if you are an aggressive investor/trader. A low P/E almost solidifies low return. If a company has a P/E of 8, there is a good chance at some point it was higher than that but it fell to a P/E of 8. An over-bloated company that is struggling to add value to the company will have a low P/E and that isn't necessarily a positive thing unless they pay a fat dividend.

Just compare it against others in the sector taking in to account each company's strengths and weaknesses.

 

P/E comparisons should only be done within the same sector.

Also, P/E is just one of the many factors taken into account when making any investing/trading desicion.

For growth stock, I would go with PEG rather than P/E.

PEG = Price to Earnings Growth ratio

 

PE is a number used for comparison of relative valuation between stocks within the same sector. It means little to nothing on its own. When people talk about high and low PE they are implicitly making a comparison to peers.