What is PE ratio and how do I use it?

PE alone is not enough. A "cheap" PE can mean the business is in trouble. Always compare PE against earnings growth. A stock with PE 40 growing at 40% (PEG=1) is fairly valued.

PE = Price / Earnings per Share. Tells you how many years of current earnings you are paying. A PE of 20 means you pay 20 years of earnings. Compare against: sector average, historical PE, and growth rate (PEG ratio).