Here is the second fundamental test to apply when buying a stock for your investment portfolio.
Price-Earnings Ratio (P/E):
The price-earnings ratio is calculated by simply dividing the price by earnings per share. The multiple represents how many years of per share net earnings are reflected in the current stock price. A P/E ratio that is too high means the stock is probably overpriced; a P/E ratio that is too low indicates lack of interest in the company. As a general rule, the desirable middle ground is between 10 and 25.
