Valuing a stock by the ratio of its current market price and some form of its per share earning of the underlying company.
Some commonly used forms of earnings include earning from the past fiscal year, earning in the previous four fiscal quarters, and expected earning for the current fiscal year.
P/E-based valuation draws on the belief that the value of a stock is backed by the value of the company that issues the stock, and the value of the company is determined by its ability to earn income for its shareholders. The higher income a company can generate for its shareholders, the higher it should be valued.
There are a few known issues with the validity of this method: