We learned in high school finance class that high P/E can be viewed as both good and bad. Why is this?

Any well developed answers from experienced investors, finance majors, or anyone else for that matter are great appreciated. Thanks guys!

We learned in high school finance class that high P/E can be viewed as both good and bad. Why is this?
A high P/E ratio can be bad in a sense that it indicates the company is over-valued. You're getting less earnings (which in turn, theoretically translate to dividends) per share you own. Whereas a low P/E means you're getting a good deal.





A high P/E ration can be good in a sense that it indicates the company is growing and investors are willing to pay a premium for it because it has a bright future.





Here's my suggestion - look at a PEG ratio. It is the P/E divided by growth. It gives a more clear picture of everything. If you're interested in this, Google PEG + Peter Lynch.
Reply:It depends upon the company. For instance, high P/E is good when company is in growth spur. Take example of VMWare which went IPO or look at Apple, they are in growth of selling new products such as iPhone in Europe etc. These two companies will dictate high P/E and investors are willing to buy these company's stocks in spite of high P/E.


In the case of banks or automobile industry (GM, F), their P/E are either single digit or no more than 10. The reason is that these companies are stable and can't grow like Cisco and Apple's of the world. Hence, they have lower P/Es. No investors willing to spend on these stocks with high P/E.
Reply:Well i can see that a high P/E ratio is great when short selling. But this is not ever really good to have a High Price to Earnings ratio. I dont know what they were teaching you in that class but the only good thing about it either than to notice the price probably will be going down and be a Red flag not to buy. The fact is the market is controlled with an invisible hand look up Adam Smith. the market will eventually correct itself to the true value. Although a P/E ratio can look high in one industry and low in another ie" Tech industry companies could have an average p/e of 5 where a Agricultural industry company could be 10. So do not compare apples to oranges when looking at the P/E.
Reply:Basically the P/E ratio is the Price (value) of the stock compared to its Earnings. A high P/E indicates that the stock is going up in value and investors are willing to pay more for it. A high P/E ratio can also indicate that a stock is over-valued and may crash soon. (Dotcom bubble, anyone?)
Reply:Trying to pick stocks using the P/E ratio is like believing the fox will properly guard the hen house. P/E ratio is old news. The market will already have made the stock price go up or down in anticipation of what the new unannounced P/E ratio will be. Follow stock price movement, technical analysis, and learn sooner what the insiders know. Say Martha Stewart!
Reply:Think about it.





High Profits verses earnings.





Takeover target. Surge up in price then down.





False sense of quality, Enron, World Com, etc.





WERE U LISTENING IN CLASS?????????