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.

66% off newsstand price

12 issues (and much more) for just £12

That’s right. We’ll give you 12 issues of MoneyWeek magazine, complete access to our exclusive web articles, our latest wealth building reports and videos as well as our subscriber-only email… for just £12.

That’s just £1 per week for Britain’s best-selling financial magazine.

Click here to take advantage of our offer

Britain is leaving the European Union. Donald Trump is reducing America’s role in global markets. Both will have profound consequences for you as an investor.

MoneyWeek analyses the critical issues facing British investors on a weekly basis. And, unlike other publications, we provide you with the solutions to help you turn a situation to your financial advantage.

Take up our offer today, and we’ll send you three of our most important investment reports:

All three of these reports are yours when you take up our 12 issues for £12 offer today.

MoneyWeek has been advising private British investors on what to do with their money since 2000. Our calls over that period have enabled our readers to both make and save a great deal of money – hence our position as the UK’s most-trusted investment publication.

Click here to subscribe for just £12