Last week’s answer

Sixty-five years old, I’m the global leader in computer printers. I was founded by two Stanford classmates, and my first product, an audio oscillator, was used by Walt Disney Studios for its film “Fantasia.” I spend nearly $4 billion per year on research and development, and produce about 11 patents per day worldwide. I power 100 of the world’s stock and commodity exchanges, including the New York Stock Exchange. My software runs more than 100 million cell phones. I merged with Compaq in 2000. A woman leads me, and I rake in almost $80 billion annually. Who am I?

Answer: Hewlett-Packard

Price-to-earnings ratios explained

You probably see price-to-earnings (P/E) ratios everywhere, but you may not have a good grasp of what they are.

The P/E ratio is a measure that compares a company’s stock price to its earnings per share (EPS) for the previous 12 months. Think of it as a fraction, with the stock price on top and the EPS on the bottom. Alternatively, tap the price into your calculator, divide by EPS, and voila — the P/E.

Consider Buzzy’s Broccoli Beer (ticker: BRRRP), trading at $40 per share. If its EPS for the past year (adding up the last four quarters reported) is $2, just divide $40 by $2 and you’ll get a P/E ratio of 20. Note that if the EPS rises and the stock price stays steady, the P/E will fall — and vice versa. For example, a stock price of $40 and an EPS of $4 yields a P/E of 10.

You can calculate P/E ratios based on EPS for last year, this year or future years. Since published P/E ratios generally represent a stock’s current price divided by its last four quarters of earnings, they reflect past performance.

Intelligent investors should really be focusing on future prospects by calculating forward-looking P/E ratios. Simply divide the current stock price by coming years’ expected earnings per share, available on many online stock quote providers like http://quote.fool .com.

Many investors seek stocks with low P/E ratios, as they can indicate beaten-down companies likely to rebound. But a low P/E also may indicate a company that’s about to fall further. Low P/Es can be attractive, but remember that P/Es vary by industry. Car manufacturers and banks typically sport low P/Es, often in the single digits, while software and Internet-related companies command higher ones, often well north of 30.

The P/E ratio is useful, but don’t stop your research there. There are many other numbers to examine when studying a stock — such as its sales and earnings growth rates, debt level and profit margins. Compare companies to their competitors, too.

Climbing Iron Mountain

Iron Mountain (NYSE: IRM) has found a profitable niche helping other firms by boxing and stowing their piles of paper records in its giant warehouses and underground bunkers. Thanks to litigation and stricter record-keeping compliance requirements, there is no shortage of paper that companies have to hold on to. Fifty-eight percent of Iron Mountain’s $445 million in revenue last quarter came from its “box business.”

Iron Mountain has two-thirds of the U.S. outsourced document storage market and about half the global market. That gives it pricing power and, with corporate documents typically kept for seven years, predictable revenues and operating cash flows. Once corporate customers sign on with Iron Mountain, they tend not to leave. Even better, once customers store their records, Iron Mountain gets recurring fees without incurring additional labor, marketing or major capital costs.

The box business drives service-related fees — such as when records are retrieved or shredded. These higher-margin services represent another 29 percent of revenue. Iron Mountain is developing e-mail and digital archiving operations.

No company is perfect, though. Iron Mountain has taken on a mountain of debt in order to buy other firms during the past five years. But it is now focusing on trimming debt, boosting its profit margins, and cranking up free cash flow. If it succeeds in these goals, it should attract — and deserve — more investors.

Beneficial owners

What does the term “beneficial owner” mean? — William Orr, The Woodlands, Texas

It refers to the true owner of a security, such as a stock. If some assets are held for you in a trust through a brokerage, for example, you’re the beneficial owner. Then there’s the common practice of brokerages holding stocks in “street name” (i.e., their own name) instead of putting the shares in your name. This is routine, and the shares still belong to you — you’re the beneficial owner. It often makes sense to leave shares in “street name” instead of having them registered to you and getting the actual certificates sent to you in the mail. When you’re ready to sell, you won’t have to dig up and mail back the certificates. You can just place a sell order.

Learn more about brokerages at www.broker.Fool.com and www.sec.gov.

Aunties know best when it comes to investments

Like many others, the Internet introduced me to investing. I was too intimidated to sit down with a stockbroker, but online I could trade and be in control. The only problem was, I bought when the market was at its highest point during the tech bubble. I rode it down and learned a lesson: Don’t listen to the analysts on TV. Many came out of the woodwork and recommended buying those dot-com companies with no earnings. It was my fault for being greedy and a short-term investor. I no longer care whether the CEO of GE has a head cold today and the stock is down a penny. As a child, I used to watch my aunt read the financial section of the newspaper every Friday, to see how her stock did during the week. Once a week was enough. She stayed the course, bought what she knew and did well. Sometimes the best investment advice is from someone who has been there. — M.T., Birmingham, Ala.

The Fool Responds: Your aunt did it right. Behind many successful investors you’ll find patience, discipline and a long-term focus.