This article is from the How to Start an Investment Program tutorial, author unknown.
The first step in determining if a stock is fairly priced is to understand the rationale for pursuing this information. To put it simply: you don't want to pay more for a stock than it is worth now or in the future. With stocks, as opposed to cars, clothes, jewelry, etc., there is no status that comes with paying more. Look as closely as you want, but I assure you, there are no designer labels or gold inscriptions attached to your stock certificates. The bottom line is that you want to pay LESS than all of the filthy rich people who can afford to pay more for the same thing. So the first thing to notice is the current market price for the stock.
The next bit of important information is the earnings of the company. Just like a practice, a company must earn revenues from the sale of its products or services to pay its bills. The more earnings the company has, the greater the likelihood of profits, and the more profits, the greater your chance will be to share in their success. This leads us to a relationship that is used as a basic indicator of company value, the price-to-earnings ratio.