Price-to-earnings ratio is useful, but doesn't reveal growth

— -- Q: Is a stock's price-to-earnings ratio (P-E) another way of saying expected profit growth?

A: The P-E ratio is a popular way to measure a firm's valuation. It's a tool that belongs in every investors' toolbox.

The valuation of a company is a gauge of how much investors are paying to own a piece of a company. In short, valuation is a way investors determine if a stock is expensive or cheap.

P-E is a deceivingly simple ratio, calculated by dividing a stock's price by its earnings per share. There are many permutations, though, of a company's earnings, and therefore many ways to calculate the P-E. If you're interested in learning about the different ways to measure P-E ratios, check this out.

But that's not what you're asking. You want to know if a company's P-E tells you anything about its growth rate. The answer is no.

If you flip the P-E ratio over, and divide the company's earnings per share by its stock price, you get the stock's earnings yield. That tells you how much earnings the company generates for every $1 in stock value, but it tells you nothing about expected profit growth.

Perhaps you're confusing P-E with the PEG ratio. PEG divides a stock's P-E ratio by its growth rate. This ratio, usually between 1 and 1.5 for many companies, it a basic benchmark of how pricey a stock is relative to its expected future earnings growth rate.

If you want to see the PEG ratio for a company, you can find it at finance.yahoo.com. Put the stock name or ticker in the Get a Quote box and you will find the PEG under Company Key Statistics in the left-hand links. It's part of the Valuation Measures box.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.