You'll want to review the price/earnings to growth (PEG) ratio for both the company you're researching and its competitors. Make a note of any large discrepancies in valuations between the company and its competitors. It's not uncommon to become more interested in a competitor stock during this step, which is perfectly fine. However, follow through with the original due diligence while noting the other company for further review down the road.

P/E ratios can form the initial basis for looking at valuations. While earnings can and will have some volatility (even at the most stable companies), valuations based on trailing earnings or current estimates are a yardstick that allows instant comparison to broad market multiples or direct competitors.

At this point, you'll probably begin to get an idea if the company is a "growth stock" versus "value stock." Along with these distinctions, you should have a general sense of how profitable the company is. It's generally a good idea to examine a few years' worth of net earnings figures to make sure the most recent earnings figure (and the one used to calculate the P/E) is normalized, and not being thrown off by a large one-time adjustment or charge.

Not to be used in isolation, the P/E should be looked at in conjunction with the price-to-book (P/B) ratio, the enterprise multiple, and the price-to-sales (or revenue) ratio. These multiples highlight the valuation of the company as it relates to its debt, annual revenues, and the balance sheet. Because ranges in these values differ from industry to industry, reviewing the same figures for some competitors or peers is a key step. Finally, the PEG ratio brings into account the expectations for future earnings growth and how it compares to the current earnings multiple.