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.

MoneyWeek magazine

Latest issue:

Magazine cover
Party's over for Putin

The only portfolio safe from Russia's rout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Hedge fund manager Hugh Hendry: 'It felt like the sun rose only to humiliate me'

In a series of three short videos, Merryn Somerset-Webb talks to Hugh Hendry, manager of the Eclectica hedge fund, about everything from China to the US, Europe, and Japan.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


19 December 1932: BBC World Service begins

The first royal Christmas message by George V gave the fledgling World Service an early boost six days after it was founded in 1932.