What is the CAPE Ratio?
The CAPE Ratio, also known as the Cyclically Adjusted Price-to-Earnings Ratio, is a measure of stock market valuation. It is calculated by dividing the price of a stock by the average of its 10-year earnings. The CAPE Ratio is used to determine whether a stock is overvalued or undervalued.
Importance of the CAPE Ratio
The CAPE Ratio is an important tool for investors to use when evaluating stocks. It provides a more accurate measure of stock market valuation than traditional price-to-earnings ratios, which are based on a single year’s earnings. The CAPE Ratio takes into account the cyclical nature of the stock market, which can cause traditional price-to-earnings ratios to be misleading.
Example of the CAPE Ratio
For example, let’s say a company has a stock price of $100 and its 10-year average earnings are $10. The CAPE Ratio for this company would be 10 ($100/$10). This means that the stock is trading at 10 times its 10-year average earnings.
Table of CAPE Ratio
Stock Price $100
10-Year Average Earnings $10
CAPE Ratio 10
Key Takeaways
- The CAPE Ratio is a measure of stock market valuation.
- It is calculated by dividing the price of a stock by the average of its 10-year earnings.
- The CAPE Ratio is used to determine whether a stock is overvalued or undervalued.
- It provides a more accurate measure of stock market valuation than traditional price-to-earnings ratios.
Conclusion
The CAPE Ratio is an important tool for investors to use when evaluating stocks. It provides a more accurate measure of stock market valuation than traditional price-to-earnings ratios, which are based on a single year’s earnings. By taking into account the cyclical nature of the stock market, the CAPE Ratio can help investors make more informed decisions when investing in stocks.
