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
Heading higher?

Or are house prices set to fall?

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

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


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.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.