There is a vast range of ways to compare shares. Some investors may look at the dividend yield, or the net tangible assets per share or perhaps the return on capital employed.
The most common statistic to compare shares is the price/earnings (P/E) ratio. This calculates the multiple of earnings that the company is trading at.
It can range from a low figure like Collection House Limited (ASX: CLH) which trades at 10x FY16's earnings, up to a big ratio such as Medical Developments International Ltd (ASX: MVP) which is trading at 179x FY16's earnings.
The problem with the P/E ratio is that it's a historical figure. A company with a low ratio may seem cheaper, but its profit could actually report lower next time. A lower earnings result would increase the P/E ratio, making it less attractive.
The opposite can be said for a company with a high ratio. It may report a much higher profit result in its next update, boosting its earnings and reducing the ratio, making it look more attractive.
Some investors use the PEG ratio to try to compensate for growth. It takes the P/E ratio and divides it by the annual earnings per share (EPS) growth. For example, a company growing at 20% a year, with a P/E of 20 will have a PEG of one. The idea is that companies with a PEG of less than one will provide better returns than those above one.
This formula helps but it still isn't the perfect formula. It doesn't account well for low growth companies which provide investors with big dividends. Risky businesses can appear good value, but only because the price of the shares are cheap to account for the risk.
Ultimately, I think investor metrics are important to be aware of, they help compare companies or sectors. However, there's more to a company than a few ratios. Qualitative analysis is also very important, which obviously isn't reflected in any financial statistics.
Foolish takeaway
Altium Limited (ASX: ALU) and Medical Developments aren't expensive just because they're trading on high a P/E ratio. Collection House and Crown Resorts Ltd (ASX: CWN) aren't cheap just because they trade on a low P/E. You have to take into consideration which direction the earnings are going.
The best investors will take all the factors into account and that will (hopefully) produce the best results. There is a good chance that all four businesses I mentioned above may outperform the market over the long-term for different reasons, but the P/E ratio alone isn't the main reason.
