The Price/Earnings ratio is the most common multiple used to estimate the value of common stock.The advantages and limitations of using P/E ratio are,

Advantages

• They are commonly used in the investment community.
• Research shows a significant relationship between P/E differences and long-run average stock returns.

The Disadvantages of using P/E ratios are,

• If earnings are negative, the resulting P/E ratio is meaningless.
• Volatility in earnings can make the interpretation of P/E ratios difficult.
• Management discretion, that is within allowable accounting practices, can distort earnings.

In general, a company with a higher growth rate will have higher P/E ratio. It makes those big companies over valued as compared to other companies. The PEG ratio is considered to be a convenient measure. The PEG ratio is calculated by,

PEG Ratio= (Price/Earnings)/ Annual EPS growth.