Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

P/E

The problem with P/E, like P/S and P/B, is that it does not explicitly account for growth or risk. In addition, P/E is difficult to put into perspective when EPS is declining or negative because of cyclically or distress or when the company is in the early stages of its life cycle. But P/E is probably the most commonly used valuation measure, and analysts all know what it means to say that a company is cheap on a P/E basis. P/E is most effectively used to evaluate and compare stable companies in the late growth and maturity stages of their life cycles.