Cyclically adjusted p/e ratio

A classic price/earnings ratio is the relationship between the current share price and one year’s earnings, usually the last year, or a forecast for the year ahead.

However, the problem with using a single year is that earnings can be volatile, so the number used may not be typical in a very cyclical industry.So Yale professor Robert Shiller developed the Shiller p/e.

This uses an average earnings figure for the last ten years – roughly one full business cycle. The hope is that this gives a more representative p/e, as it is based on less of a snapshot profit figure than the classic ratios.

In all cases, however, a low p/e tends to indicate that a stock is cheap, while a high p/e suggests it is expensive.

• See Tim Bennett’s video tutorial: ‘Cape’ – Moneyweek’s favourite valuation ratio.

Paul Hodges: house prices could fall 50% in 'Great Unwinding'

Merryn Somerset Webb interviews Paul Hodges about deflation, the global economy's 'Great Unwinding', and how Britain's house prices could halve.


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27 January 1969: Students set up the LSE-in-exile

Students at the London School of Economics occupied the University of London Union building on this day in 1969, in protest at the erection of new security gates.