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

 

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.