Price-to-Earnings (P/E) Ratio: Overview, Importance, Example

What Is a P/E Ratio?

By Matthew Frankel, CFP – Updated Jul 9, 2025 at 10:32 AM

Key Points

P/E ratio compares stock price to earnings, signaling if a stock is valued fairly.
Use P/E to compare similar companies, aiding in spotting overpriced or underpriced stocks.
Check other financial metrics along with P/E for a comprehensive stock analysis.

The price-to-earnings ratio, also known as the P/E ratio, is one of the most commonly used stock valuation metrics, and it is important for any investor to understand. In this article, we’ll take a closer look at what the P/E ratio is, how to calculate it, and how to use it as part of your investment analysis.

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An infographic defining the price-to-earnings ratio: P/E ratio equals stock price divided by earnings per share. — Image source: The Motley Fool

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So Apple trades for 26.2 times its trailing-12-month earnings. If we wanted a more forward-looking metric, we can use Apple’s projected earnings over the next 12 months, which are $6.23 per share. If we use this, our forward earnings calculation looks like:

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Now let’s say that you’re trying to decide between Apple and Microsoft (MSFT +0.55%). On the same date, Microsoft traded for $255.12. Its trailing-12-month earnings were $8.99 per share, so its trailing P/E ratio could be calculated as:

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Image of a twelve month price equity ratio example

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Apple’s trailing P/E is 26.2, while Microsoft’s is 28.4. Based on the P/E ratio alone, Apple appears to be the cheaper stock. However, as mentioned above, it’s important to understand the P/E ratio is just one metric that should be used in stock analysis and doesn’t tell the whole story.

So when conducting an analysis of two companies like this, the best practice is to use the P/E ratio along with other metrics for both companies to develop a thorough comparison of the two investment opportunities.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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@MattFrankelCFP

Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Costco Wholesale, Microsoft, Target, and Walmart. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.