Advertisement
CAPE stands for cyclically adjusted price-to-earnings ratio. Here’s how it’s used and how to calculate it.
The CAPE ratio, also known as the Shiller P/E, refers to cyclically adjusted price-to-earnings. It’s a metric created and trademarked by economists Robert Shiller and John Campbell.
The traditional price-to-earnings ratio divides a company’s stock price by its earnings per share. The CAPE ratio uses 10 years of inflation-adjusted earnings instead of just a single year for the traditional P/E ratio. This captures a company’s earnings over a full business cycle, smoothing out earnings volatility. The traditional P/E ratio can be distorted in years of unusually good or bad results.
P/E ratio = Price per share ÷ earnings per share
CAPE ratio = Price per share ÷ 10-year average inflation-adjusted earnings per share
In practice, the CAPE ratio is most often used as a barometer of overall stock market valuation. When the ratio approaches historic highs, market watchers may anticipate a market decline. A historically low CAPE ratio is considered a sign of attractive pricing, a potential buying opportunity.
However, Shiller, a Nobel prize winner, has cautioned against making short-term investment decisions based on the CAPE ratio. He and Campbell describe the ratio as a predictor of 10-year returns. It’s a long-term metric, “not a timing mechanism.”
Other experts have questioned whether the historic CAPE ratio average, around 17 for the S&P 500, is meaningful today, given changes in accounting rules, interest rates, demographics and other factors.
Example: “Adwin believed Canadian stocks were less expensive on average than U.S. stocks, with the Canadian market trading at a CAPE ratio of 22, compared to 34 for the S&P 500. Although Poland looked even cheaper at 11, he felt more comfortable investing in North American markets.”
Newsletter
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Which ETFs should you invest in? Which ones best suit your risk tolerance? What about personal ethics? Check out...
If you’re looking for a financial advisor or planner, learning about their credentials can help you choose the right...
Nvidia doubles revenue in one year, Canadian inflation moves in the wrong direction, Target misses badly, Walmart beats earnings...
Here’s how to get your free ticket to attend the MoneyShow virtual expo.
Learn how to get mental health support in Canada, whether or not you have workplace benefits or insurance coverage.
Canadians with no children or siblings must consider estate planning alternatives. Here’s why trust companies can be a good...
The Trump effect and Trumponomics, Shopify’s huge earnings beat, it’s sunny days for Suncor shareholders and more.
Should you be paid as a power of attorney? Learn about the compensation rules in Ontario and how to...
You started investing in your 20s, and you feel pretty good about doing it. But now what? Consider impact...
