There is a significant difference between an undervalued company and a cheap company. Cheap companies have seen a tumble in their stock price because there is something fundamentally wrong. Furthermore, all the analysis in the World might not detect the fundamental problem with the company. This is a risk that all value investors take when investing in beaten down companies. In other words, the ratio measures how cheap the stock is while taking into account its earnings growth.
Value is relative.
Manias exist from time to time, whether it be tulips, gold, or Internet stocks. You usually only get a bargain when something is out of favor. Avoid investing in a stock that has significant uncertainty, it could go from a value stock to a Chapter 11 stock faster than you think. Often you must be patient. Qualitative Analysis 5.