P/E Ratio

Definition: The price of the stock divided by the earnings per share.  It's used to determine whether or not a stock is overvalued.

TeenAnalyst Advice: People often get caught up in a stock's P/E ratio.  It's not really all that great of a way of measuring a stock's true value.  But it is a good way to get a quick idea of if it's overvalued compared to its competitors.

A stock with a low p/e ratio doesn't necessarily have to be a "good" one.  Some industries have traditionally low p/e ratios, such as homebuilders.  A technology company may be able to justify a p/e ratio of 40, but a homebuilder may only be able to justify a p/e of 12.