For a stock quoting at a low PE ratio, the market is concerned about one of the following:
Low growth industry, limited scalability: If the business has limited growth potential or the industry in which it operates does not offer enough scalability, the future might not hold significant value.
No competitive advantage and at the mercy of the competition: If the company does not have a competitive advantage, the future visibility in terms of scalability and profitability of the business is clouded. As competition can severely impact future earning potential.
Corporate governance issue: As an investor, we are minority shareholders in a business. If history shows that the majority/promoter shareholder is not being fair to the minority shareholders by – siphoning out money from the business through related party transactions or other means, then even though the future of the business might have great value, but the same might not flow down equally to the minority shareholders. Also, if the past track record of the management shows frequent poor capital allocation through unwarranted diversification or expensive acquisitions, there would be difficulty in assigning value to future cash flows, as you would not know how the money would be deployed.
Technology or regulatory change: If there is a technology or regulatory change that is likely to affect the future of the business, the current low PE could in effect be reflecting this future structural change. Such businesses available at attractive PEs are the biggest value traps. E.g. MTNL in India, Kodak in the US.
For a stock quoting at a high PE ratio, the market is indicating all of the following (These are mostly reverse of above):
High growth or very long visibility of growth: The earnings are expected to grow rapidly or there is very high long term visibility of reasonable growth. The overall market opportunity could be big which could provide scalability potential.
Competitive advantage: The company has a competitive advantage which should help it sustain its scale and profitability and grow with or above industry rate.
No doubts on capital allocation and corporate governance: The majority/promoter shareholder is fair with the minority and there has been no past record of poor capital allocation, which raises concerns about future capital allocation.
The market does not perceive any technology or regulatory threat to scalability or profitability of the business.