Here's a good ratio for a cape, such as Cape May, NJ: The more people going there, the greater the misery when you get stuck in traffic.
But the CAPE ratio actually stands for Cyclically Adjusted Price/Earnings. We assume that clears that up. Nothing more to say really...
Okay, we'll help you out. Stock market analysts use the CAPE ratio to measure S&P 500 companies' earnings per share, for example, over a 7-10 year period. It is believed that this will help smooth out any big fluctuations that can happen in short-term bursts. The goal is to look at things over a relatively long time. Like a full economic cycle.
Doing this can help determine if the market is overvalued or undervalued. Since recessions cause most companies' earnings to go down, the inventor of the CAPE ratio, Robert Shiller, believes one should take an average of earnings over 7-10 years. In 1997, Shiller said the CAPE ratio was at a record high that year thanks to high stock prices and lower earnings, and he predicted the value of the stock market would be 40% lower in 10 years. Sure enough, the stock market plunged 60% in 2008 at the start of the Great Recession.
The CAPE ratio is also very high at the moment in 2018, with stock prices up and a CAPE ratio of 33.78. The long-term average is 16.8, so who knows when the next market correction will occur? (Shiller, maybe? If you know him, can you give him our number...)
Related or Semi-related Video
Finance: What is Earnings Per Share (EPS...33 Views
finance a la shmoop what is earnings per share or EPS? okay you know the lemonade
stand the one with 20 grand in sales and 16 grand in gross profits and yeah will [Balance sheet for Lemonade Stands R Us appears]
spare you the gross jokes you know the customer asks lemonade.. what the fly
was doing in his lemonade and yes of course she said the backstroke what else
would you expect from the people at Schmo really?
so after gross profits there were operating expenses like those and then
operating profits down here that 7,500 thing then there were taxes and yeah
there are always taxes we can grumble about and then finally net income aka [Net income appears on balance sheet]
earnings but then below earnings you'll see that there are a hundred shares in
this little company the founder owns 60 of them mom owns 10 the new stepdad owns
20 he was guilted into it by you know the divorce lawyer and Enrique the
gardener for some reason who has cleverly weaseled his way into the
families arts and minds owns the last 10 its annual report time and the investors
want to know what their earnings per share were so that they can all compare
relative performance on their investments right so the total earnings
of the company in this example was five thousand two hundred fifty bucks which
means that the earnings per share of our little lemonade stand company here or
that 5,250 figure divided by a hundred or 52.50 a share that's [EPS formula appears]
what each share earned if you divvy the company into a hundred little pie slices
or parts so yeah earnings per share equals earnings per slice o pie or wait
lemonade pie has that been done yet time for a new business venture what do you [A plate of lemonade pie appears]
think we're taking investors just call us please
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