CAPE Ratio
Candlefocus EditorThe CAPE ratio measures the effectiveness of the company by comparing its stock price to its average, adjusted earnings over a 10-year period. This ratio is similar to the more commonly used price-to-earnings ratio, but takes into account the influence of different economic trends on a company’s profitability by including an inflation adjustment.
The CAPE ratio can provide an investor with insight into a particular company’s valuation. By analyzing this ratio, one can determine whether a company’s stock is over-or under-valued. If a company’s current price is significantly higher than its average earnings, this indicates that the stock may be overvalued. Conversely, if the price is significantly below the average earnings, the stock may be undervalued.
The usefulness of the CAPE ratio lies in its ability to analyze a company’s profitability while taking into account the business cycle of the overall economy and macroeconomic forces, such as inflation, that can have a major effect on the bottom line of a company. By comparing the stock price to inflation-adjusted earnings over the past 10 years, an investor can gain insight into a company’s long-term financial performance.
The CAPE ratio is a useful tool for investors seeking to analyze the financial performance of a publicly held company. By taking into account the impact of economic cycles and inflation on a company’s profits, investors can gain a better understanding of a company’s valuation and make more informed decisions when investing in the stock market.