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 EST

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.

Loading paragraph...

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

Loading image...

Loading paragraph...

Call vs. Put Options

Options trading comes in different flavors. We go over the ways here.

How to Calculate Your Gross Income Per Month

Calculate your monthly inflow before taxes using this metric.

What Are Meme Stocks and Are They Worth the Investment?

When investing in a stock goes viral, you've got a meme stock. Are they a good idea?

7 Best ETFs to Buy in February 2026

ETFs can help eliminate risk because they tend to be less volatile than individual stocks and give exposure to a range of assets.

Loading hub_pages...

Loading paragraph...

Loading image...

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:

Loading paragraph...

Loading image...

Now let’s say that you’re trying to decide between Apple and Microsoft (MSFT -2.17%). 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:

Loading paragraph...

Image of a twelve month price equity ratio example

Loading image...

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.

Loading paragraph...

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.

TMFMattFrankel

@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.