Stock Valuations 101 Although there may be gurus who hearken to the influence of the Zodiac or lunar cycles, the valuations of most stocks are based on what's known as the price-earnings ratio. In simple terms, that's the price of one share divided by the earnings per share. The latter is the amount of earnings for the company as whole divided by the number of shares outstanding. The price-earnings ratio depends on several key factors. Perhaps of greatest importance is the company's rate of growth. The rule of thumb is that the faster the rate of growth, the higher the price-earnings ratio, but there's a limit to what would be considered reasonable. A typical range of price-earnings ratios is between 10 and 20 times. That's true of both individual stocks and the stock market as a whole. Larger, more mature companies will probably grow more slowly while some small companies might well increase their profits more rapidly. There are caveats. In a pe
Investment and economic observations by N. Russell Wayne, CFP, MBA. Mr. Wayne is the president of Sound Asset Management, inc. and former Managing Editor of The Value Line Investment Survey.