Module 6 · Investment Ratios & Comparison · Lesson 2
Stock Analysis Ratios: P/E, ROE and Debt Explained
A ratio puts two figures in context. Start with the exact formula, reporting period, and company disclosures; no single ratio is a complete judgment about a stock.
Quick Answer: Which ratios should a beginner understand?
Price-to-earnings (P/E) relates a share price to earnings per share; operating margin relates operating income to revenue; and a debt-to-equity measure relates liabilities or debt to shareholders’ equity, depending on the stated definition. They answer different questions. Check the formula and the underlying filing before comparing companies.
What does the P/E ratio show?
P/E = share price ÷ earnings per share. The SEC’s Investor.gov describes it as a way to compare price with earnings, a company’s past, or another company. The dated Apple example below calculates historical P/E, ROE and debt-to-equity from identified primary-source inputs. If earnings are zero or negative, a standard positive P/E is not meaningful. Check whether the quoted earnings use the latest year, the past 12 months, or a forecast.
What does operating margin show?
Operating margin = income from operations ÷ net revenues. The SEC gives this formula in its financial-statement guide. Apple’s FY2025 operating margin is 133,050 divided by 416,161, or 31.97%, rounded; profitability and valuation ratios answer different questions. Compare like reporting periods and read the notes and management discussion for one-time items, segment changes, or accounting differences. A high margin by itself does not establish a good investment price.
What does debt-to-equity show?
A debt-to-equity measure compares financing obligations with shareholders’ equity. Sources use different numerators: the SEC’s beginner guide illustrates total liabilities ÷ shareholders’ equity, while some services use only interest-bearing debt. Label the version you calculate and avoid comparing figures made with different definitions. Equity can be small or negative, which can make the ratio hard to interpret. Look at cash flow, maturities, and debt notes as well.
What makes a comparison misleading?
Different industries, reporting dates, accounting choices, and numerator definitions can produce very different ratios. FINRA advises comparing a company’s ratios with its industry because averages vary substantially. Check the units and period in the original 10-K or 10-Q, including any amendments, before relying on a screen or chart.
How should you use ratios together?
- Identify the question: price versus earnings, profitability, or leverage.
- Write down the formula and whether the data are annual, quarterly, trailing, or estimated.
- Find the numbers in the company filing and read the related notes and MD&A.
- Compare with an earlier period and a genuinely comparable business, then explain any difference.
A ratio is a starting point for research, not a universal pass mark or a buy or sell signal.
Apple: P/E, ROE and debt-to-equity with dated inputs
| Ratio | Defined calculation | Rounded result |
|---|---|---|
| Historical P/E | 255.46 / 7.46 | 34.24 |
| ROE using average book equity | 112,010 / ((56,950 + 73,733) / 2) × 100 | 171.42% |
| Selected borrowing / closing book equity | (12,350 + 78,328 + 7,979) / 73,733 | 1.34 |
- Apple’s 2026 proxy reports the September 26 closing price of $255.46. Divide it by FY2025 diluted GAAP EPS of $7.46.
- For ROE, first average beginning and ending book equity: (56,950 + 73,733) / 2 = 65,341.5. Divide annual net income of 112,010 by that average and multiply by 100.
- Add current term debt, non-current term debt and commercial paper for borrowing of 98,657. Divide by ending book equity of 73,733.
This is a retrospective calculation using annual results published after the price date; it is not the P/E available to an investor that morning. Average book equity differs from market value. Share repurchases reduce book equity and can raise ROE without the same increase in business profitability. The selected borrowing measure excludes leases and other liabilities; these ratios alone do not establish a fair price or safety.
Sources: Apple FY2025 Form 10-K: income and equity statements, Apple 2026 proxy: September 26, 2025 closing price
Check your understanding
1. What historical P/E results from Apple’s September 26, 2025 closing price of $255.46 and FY2025 diluted EPS of $7.46?
A. 7.46. B. 34.24. C. 255.46.
Show answer and feedback
B. 255.46 divided by 7.46 is 34.24, rounded. This retrospective calculation uses annual results published after the price date.
2. What is needed to compare two debt-to-equity figures?
A. The same numerator definition and comparable dates. B. Only the larger figure. C. Only the latest stock price.
Show answer and feedback
A. A debt-only numerator and a total-liabilities numerator measure different things.
3. Does a high operating margin prove a stock is cheap?
A. Yes, always. B. Only when the stock rose yesterday. C. No, it describes profitability for a period, not the investment price by itself.
Show answer and feedback
C. Margin must be interpreted with the reporting period, company risks, and price.
Why question: Why might two companies with the same P/E deserve different follow-up research?
Show a sample explanation
Their earnings quality, debt, growth assumptions, risks, and industries may differ. The same ratio does not mean the businesses or their future outcomes are identical.
Try it: calculate a filing-based margin
Open the SEC EDGAR search prefilled for Apple. In the latest 10-K, find net sales and income from operations for two years. Calculate operating margin for each year, note the reporting periods and units, and read MD&A for an explanation of the change. Use the live filing’s numbers, not an undated ratio card.
Where can you verify the definitions?
- SEC: Beginners’ Guide to Financial Statements
- SEC Investor.gov: Price-to-Earnings Ratio
- FINRA: Evaluating Stocks
- SEC Investor.gov: Using EDGAR to Research Investments
End of Lesson · Continue to the Next Lesson
AI responses are for educational purposes. Always verify with official course materials.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
Sources and reference material
Primary sources and original reference material for the concepts discussed on this page.
- Apple Inc., Form 10-K for fiscal 2025 (year ended September 27, 2025), filed October 31, 2025
- www.sec.gov — aapl014016 def14a.htm
- SEC EDGAR: Apple company filings
- SEC: Beginners' Guide to Financial Statements
- SEC Investor.gov: Price-to-Earnings Ratio
- FINRA: Evaluating Stocks
References added 14 October 2026.
AI responses are for educational purposes. Always verify with official course materials.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
