That's one way to look at a P/E ratio. It's the "cost" of buying earnings. The higher the P/E, the more you're paying for a future string of earnings. P/E ratios can range from one to infinity though finding a stock with a P/E ratio of one is very rare unless the stock is about to go out of business within a short period of time.

A rule of thumb for P/E ratios is this: the higher the P/E the higher the expectations investors put on a stock. In other words, investors will pay more for stocks that are growing earnings. They will pay the most for stocks that have increased earnings in a meaningful way each year for several years. They love stocks that show earnings growth of 10%, then 20%, then 30%, each year not only growing but growing faster than the last. These are stocks that are increasing the rate of growth each year. As the company is getting bigger, it's also getting more profitable. A high P/E ratio is warranted because investors know this is a company that is getting more efficient and will most likely continue to grow profitably.

The caveat that goes with high P/E stocks is that investors are fast to sell stocks that don't live up to expectations. If a stock has projected earnings of $1 but only delivers 95 cents, many investors will think the ever- increasing profits may have come to an end and will get out. They have paid for growth, and when it's not there, they move on. High P/E ratio stocks will often be the most volatile since any one quarter's earnings may be cause for celebration or dumping.

Another way to look at the P/E ratio is to look at it as the time it will take to get your money back. This is one way Peter Lynch looks at stocks, he of the famed Fidelity Magellan fund performance that will most likely never be matched. He suggests that investors see the P/E as the number of years it will take for them to get their invested money back if the company simply earns the same amount of money forever. In other words, earnings don't grow nor do they decrease. They stay the same. That way, if you buy a stock with a P/E of 10, it will take you 10 years to recoup your investment if earnings remain constant. However, if you buy the stock with a P/E of 10 and it increases earnings, then your investment comes back faster. If it earns less, your length of recovery takes longer. It's an interesting way to think of buying a stock, especially when a stock sports a P/E of 50 or more. Makes you hope earnings will really grow fast.

Remember that P/E ratios should be calculated from earnings made by operations. Those are earnings from the ongoing business. Any extraordinary events such as sales of divisions or of a building, whether at a profit or loss, should be excluded as one-time events. The only exception is when a company reports "extraordinary" events quarter after quarter after quarter. Then those events become part of operations and should be included.

So what's a good P/E? The best way to tell is to know the historical P/E for a stock. What has been the average annual P/E over the last 10 or 20 years? If the range has been between 5 and 25 and the stock is trading at a P/E of 30, then it's well above its highest average annual P/E and caution is advised. If it's trading closer to five, then it's an indicator that maybe the stock is getting to a level worth buying. But again, no one number tells the story. There has to be a reason for the stock to be trading at 30 (or near five). Investors need to look at why the stock is "cheap" or "expensive." Maybe the company has a new patented medical device and deserves a higher P/E. Maybe the company didn't get approval from the FDA for a new drug and deserves a lower P/E. The P/E alone doesn't tell the whole story. Investors need to dig to get that. (Average annual P/E ratios can be found in Value Line.)

Another way to gauge whether a P/E is "rich" or "cheap" is to look at the average P/E for all stocks in the company's industry and in the S&P 500 index. If your stock has a higher P/E than the average P/E for all stocks in its industry, then investors believe the company will grow faster than its competition. If it's lower, then investors think it will lag competition.

The same is true for the S&P 500 stocks. A stock with a higher P/E than the average P/E for all stocks in the index is one that investors believe will grow faster than the average stock. If it's lower, then expectations are as well. You can find the industry average P/E for a stock on the AOL Money and Finance page.

Another measure of P/E ratios is comparing the P/E with the growth rate of earnings, known as PEG ratio or Price to earnings to growth. If that number is less than 1, many investors believe the stock is undervalued. If it's above 1, then it may be over valued. Here's the math: a stock has a P/E of 15 and its earnings are growing at 10% a year. That puts the PEG at 1.5 (15/10). Some believe that's an overpriced stock. If the same stock is growing earnings at a rate of 20% a year with a P/E of 15, then PEG is .75 (15/20). Some think that's an undervalued stock.

There's a lot of info in one number, the P/E ratio. Not enough to buy or sell a stock, but it's a great way to understand the value of one, and just as important, how other investors see the stock. Finding a low P/E stock is interesting, but it doesn't tell enough to know whether to buy or sell. It may have a low P/E because forward earnings are being cut dramatically. Or it may be that the whole market is being sold, no matter what the valuations, and this stock is a real bargain. Only more homework can determine whether it's worth owning or avoiding.

Ted Allrich is the founder of The Online Investor, founder of Allrich Investment Management, LLC, as well as the author of the book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.