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What is a CAPE Ratio?
The CAPE ratio is defined as a price earnings ratio that measures the average of adjusted earnings over a period of 10 years. It is a price valuation method that determines the real earnings per share (EPS) over a period of 10 years which is adjusted for inflation. The CAPE ratio is an acronym for the cyclically adjusted price-to-earnings ratio, otherwise called the Shiller P/E ratio. The CAPE ratio has been widely adopted across various industries and it gives a projection of future stock market returns in the Stock Exchange market. A professor at Yale University, Robert Shiller popularized the cyclically adjusted price-to-earnings ratio (CAPE ratio) and this is why the ratio is also called the Shiller P/E ratio. The formula for calculating CAPE ratio is; CAPE Ratio = Share Price / 10-yr Avg. Inflation-Adjusted Earnings
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How is the CAPE Ratio Used?
In the United States, the CAPE ratio is used as a valuation method for the US S&P 500 market index. Companies and industries in the US also use the CAPE ratio to determine their inflation-adjusted earnings which how fluctuations in profits over a period of time affect their real earnings. There are many reasons fluctuations in corporate profit may occur, such as changes in the purchase power of consumers, inflations, recessions and downturn in demand. These fluctuations significantly impede the profitability of a company or industry. The CAPE ratio is a valuation ratio that helps determine volatility in earnings per share that occur over a period of ten years. Here are some important things to note about the CAPE ratio;
- The CAPE ratio is an acronym for the cyclically adjusted price-to-earnings ratio, it was popularized by Robert Shiller, a professor at Yale university.
- The CAPE ratio evaluates the financial performance of a company over a period of ten years with effects of fluctuations and inflations on the companys earnings taken into account.
- The CAPE ratio is also used in the stock exchange ,market to determine whether a stock is undervalued or overvalued.
- This ratio measured that average earning per share of a company which is adjusted for inflation and calculated over a period of 10 years.