The most basic valuation ratio of a company is the price to earnings ratio. The ratio is quite straightforward actually, as compared to some more complex ratios we will later learn. The formula for a price to earnings ratio is market value per share divided by earnings per share.
Let's do an example of a current price to earnings ratio. Currently as I write this blog AAPL trades at 134.70 per share. The earnings estimates for AAPL for fiscal year 2007 are for the company to earn $3.73 per share. We then take $134.70/$3.73 and receive a ratio of 36.11. Some people prefer to do a price to earnings ratio on next year's earnings. In this case, we still take $134.70 a share, but we divide it by $4.38, next year's estimate. AAPL has a price to earnings ratio of 30.75 on next year's estimates. 
Investopedia is a good source of some basic investment measures, and their price to earnings ratio description serves a beginner well. Price to earnings ratios are sometimes called price multiples or earnings multiples as well. Generally, a company with a high price to earnings ratio, such as Apple, is expected to produce a large amount of growth in the future. In order to justify such a high P/E ratio the company must deliver on their growth promises.
It is important to remember that a price to earnings ratio is just one small step in finding the value of a company or stock. It is never wise to buy or sell a stock simply based on one ratio. In the coming days we will visit another investment valuation ratio that should help you value a company even more thoroughly.
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