How can a stock's P/E ratio be compared to other stocks?

A stock's P/E ratio can easily be compared to other stocks in the same business or with other similar attributes. A P/E ratio of a single stock can also be judged against the average P/E ratio of an entire industrial sector or of a large market index, such as the Nasdaq or the S&P 500.

Is a higher P/E ratio a better investment?

And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is. However, the above assumes a value mindset when looking at the market. If you prefer to invest in larger, less volatile company stocks, you may be willing to pay up for a pricier investment with a higher P/E ratio.

Do growth stocks have higher PE ratios?

A stock’s PE ratio can rise if investors believe future earnings will be higher than current levels, which is typically how “growth stocks” are defined. According to Robert Johnson, a chartered financial analyst and CEO of Economic Index Associates in New York, higher PE ratios often go hand-in-hand with such growth stocks.