When looking to start a position in a company, one of the main things people want to know is are they buying the stock when it is cheap.  First off, cheap is not good, under valued or “beaten up” is better.  Cheap stocks in bad companies are expensive.  A person still wants to be looking for good strong companies that have a stock that is under valued.

 How do you know if a stock is a good buy?  One of the methods that Cramer uses is as follows:

“If a stock has a price-to-earnings multiple — remember E (the earnings) times M (the multiple) equals P (the price) — that’s lower than its growth rate, then that stock is cheap,” Cramer said.

So what does that mean?  First, you need to know the growth rate of the company.  If a company has a growth rate of 12% but currently trades at 12 times earnings or below, this rule says the stock is “cheap”.  The inverse is also true.  If the company has a growth rate of 8% but trades at 9 times earning or higher, this stock is expensive.

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