A high P/E ratio means that investors expect the company’s earnings to grow rapidly in the relatively near term (I would expect about 5 years or less). However, P/E Ratios almost always normalize over the long term to between 10 and 25, depending on the industry. As a result, if you’re paying a premium today, when the stock finally normalizes, your total investment may not have grown as much as an undervalued company that normalizes — in fact, you may have lost money.

When valuing a company, one should avoid the chance that he may be paying too much too soon, because that very frequently leads to disappointment.

Also, another note Graham very much likes using cash flow in the financial analysis of a company.