The Rule of 72, 114, and 144
Rule of 72 => Estimating how long it takes to double your money
For example, you expect to get an 8% rate of return on your money. At that rate, how long will it take to double your money?
To calculate this, simply divide 72 by 8 to get 9 years.
Rule of 114 => Estimating how long it takes to triple your money
For example, you expect to get an 8% rate of return on your money. At that rate, how long will it take to triple your money?
To calculate this, simply divide 114 by 8 to get 14.25 years.
Rule of 144 => Estimating how long it takes to quadruple your money
For example, you expect to get an 8% rate of return on your money. At that rate, how long will it take to quadruple your money?
To calculate this, simply divide 144 by 8 to get 18 years.
P/E Ratio (Price-Earnings Ratio)
The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple," or simply "multiple," "P/E," or "PE") is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share.[1] A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the PE ratio is known as the earnings yield.[2] The earnings yield is an estimate of expected return to be earned from holding the stock if we accept certain restrictive assumptions.
P/E Ratio = Price per Share / Annual Earnings per Share
There are two ways to look at P/E ratio.
Some investors find a high P/E ratio more favorable. A high ratio essentially means that investors are willing to pay more for the stock. Perhaps earnings growth is extremely good as well, and would help support the high p/e ratio. My suggestion would be that if you are a risk taker, and tend more towards momentum type investing, this would be the way to use p/e ratio.
Other investors seek out low p/e ratios. A low p/e ratio could be a sign that a stock is undervalued, and at a level where it is a good buy. You should always look at other things as well, to check if the company simply is just not doing well and earnings are shrinking. However, if the company is sound, with decent prospects for the future, these types of investors seek out lower p/e ratios.
One thing I always recommend is that p/e ratio should be used in combination with sector averages and competitors ratios. For example, it is far more important on how a particular company's ratio compares with competitors and the sector group overall. A 'good' or 'bad' p/e ratio number may be very different depending upon the sector, and may change with time for the same sector. If the market is strong, typically average p/e ratios are higher. The investor has no way of knowing what is an 'average' p/e ratio unless you check competitor companies and the overall sector average.
In summary, the answer to your question really depends upon what type of investor you are. You should also use competitor company ratios, and the average ratio of the sector to compare what you are interested in to see if it is truly a high or low p/e ratio. Finally, additional data points should be looked at. What may appear at first sight to be a high p/e ratio may actually not be if the company is growing quickly enough, and the reverse may apply to what appears to be a low ratio.
Links:
http://en.wikipedia.org/wiki/PE_ratio
http://invest-faq.com/cbc/analy-pe-ratio.html
http://www.investopedia.com/terms/p/price-earningsratio.asp
http://eblog-entrepreneur.blogspot.com/2008/07/what-is-pe-ratio-and-how-to-calculate.html
