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 Quality?50 Views
Finance allah shmoop What is earnings quality Well it's just
math right Whatever Dot com just produced a dollar thirty
two in earnings One hundred thirty two cents of wall
street Love and profit How can there be a quality
to that number The number is a number right Well
yes but rather there are different qualities of earnings What
if we told you that one hundred percent of whatever
dot coms earnings came from Adsit sold tto forty thousand
different buyers because its website was just that popular All
of the growth came intrinsically meaning that users just loved
using the site and nothing meaningful changed on their balance
sheet or wall street Fancy engineers doing creative clever things
with the selling of money Other than that the cash
account went up because dead profits and they kept him
okay Those air very high quality earnings Really sure about
that C we threw a curveball in there We do
that all the time All right Well what if we
told you that seventy percent of their ad sales came
from a subsidiary in china and were all collected in
our m b the chinese currency and that in this
quarter well that the chinese currency appreciated thirty eight percent
relative to the dollar Well essentially all of their big
growth The big growth that we thought was such high
quality earnings came because the chinese currency did well not
because their business did all that well so wait Had
the chinese currency just been flat the company wouldn't have
earned anything close to a dollar thirty to seventy percent
of the sales and almost forty percent of currency gain
there Well it means that the company happened to have
a lot of sails in a country with a fast
appreciating currency It wasn't necessarily a direct reflection that the
company was doing so well and had such high quality
earnings Yeah it's great that they were in a hot
market and highly appreciating currency but if the currency hadn't
gone up so much relative to the u s dollar
in which they report their earnings toe wall street while
the real urn things end of the company would have
been more like a dollar maybe less so that it
be low quality earnings What about high quality earnings Well
really simply you said you'd sell three hundred tractors this
quarter the street thought you'd sell three hundred ten You
actually sold three hundred twenty you said margins would be
twenty percent The street thought they'd be twenty two percent
and they actually were twenty five percent You said you
generate twenty million dollars in cash the street thought you
generate twenty two and you actually did generate twenty five
million dollars in cash High quality financial results Simple You
just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors
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Normalized earnings are, more or less, the average of what you typically earn. Picture a bell curve. Zoom in on the middle of it. There you go.
What is Earnings Per Share (EPS)? Earnings Per Share is a metric by which to measure the profitability of a public company as a result of how much...