Shiller CAPE or PER ratio: Definition, calculation, advantages and criticism

As I already mentioned in this blog, the FOR It is one of the most used ratios in the valuation of companies, although it also has its drawbacks. To solve some of the problems of the PER to value the market, the professor of finance at Yale University and Nobel laureate in economics, Robert Shiller devised a new ratio, called the CAPE or also nicknamed PER by Shiller in honor of its author. In this article I will show you what the Shiller CAPE or PER consists of, how it is calculated and some of its advantages and disadvantages.

What is the Shiller CAPE or PER ratio?

Shiller's CAPE (“Cyclically Adjusted Price to Earnings Ratio” or “Cyclically Adjusted Price-Earnings Ratio”) or PER is a stock market valuation ratio that measures the relationship between the current price of a stock index and the average real net profit of the company for the last 10 years. Therefore, it is also often called PER10.

Cálculo del ratio CAPE or PER de Shiller

Calculating the Shiller PER of a stock index is somewhat more complicated than calculating the normal PER.

First, you need to adjust the earnings of the companies in the index companies to their current value. To do this, we must take into account the inflation that has occurred since the year of publication of the benefits to update the figure at current prices.

Once we have adjusted the benefits of the last 10 years, we have to calculate their average value, adding all the values ​​and dividing them by the number of years, that is, by 10.

Finally, we divide the current price of the stock or the stock index by the average value of the updated earnings that we have calculated, and in this way we obtain the CAPE or Shiller PER of an index.

As I already told you, it is not an easy task. Fortunately, there are web pages that automatically calculate this indicator so that we do not have to do it ourselves and thus save ourselves a rather tedious work.

Why use CAPE instead of PER?

The main benefit of CAPE compared to the market's PER is that by being limited to a time frame of 10 years, it helps to mitigate the effects of economic cycles on the result of this ratio, since normally these 10 years include both adjustment and economic expansion.

Is CAPE an accurate indicator?

It is not an infallible indicator, but it is quite useful to determine whether or not the market may be overvalued as a whole.

There is an inversely proportional relationship between CAPE and the profitability of the stock market during the next 10 years. In other words, the higher the CAPE today, the lower profitability you should expect for the next few years. In the following graphs you can see the relationship between both:

Relationship between Shiller's CAPE or PER and 10-year stock market profitability

Relationship between Shiller's CAPE or PER and the 10-year stock market return

As you can see, the relationship between CAPE and the future profitability of the markets is quite clear, so we must take this indicator into account if we want to determine the state of undervaluation or overvaluation of the financial markets as a whole.

Criticism of Shiller's PER

The main source of criticism of CAPE comes from the number of years used to calculate it. Shiller chose this number of years because, in principle, 10 years is long enough to cover both periods of economic and credit expansion and recession. However, this does not have to always happen this way, since there may be periods of expansion or economic crisis that extend beyond this period of time. It can also happen that in a period of 10 years there may be 2 recessions, as happened in 2.001 with the dot-com bubble and in 2.008 with the crisis that we are still suffering from.

Another criticism of CAPE is related to the method of estimating the benefits of when calculating the ratio. This is due to the effect of the repurchase of shares, which is not taken into account when estimating profits in stock indices, so the precision of this index may be slightly altered by these practices.

Another criticism I make of this indicator and all general indicators is that it measures the valuation status of the stock market as a whole, but the fact that an index is overvalued or undervalued does not mean that all the companies that are part of it they are too. A low CAPE can tell us in which markets we can find more bargains, but it does not mean that all the companies listed on it are a bargain, far from it.

Finally, we must always combine this quantitative analysis with a qualitative analysis. A market can trade at a very low CAPE because there are rational reasons for it. For example, the CAPE of many oil powers could collapse if an alternative to oil is discovered tomorrow that makes it useless and this should not mean that there is a buying opportunity since this fall would be related to compelling reasons.

Shiller's PER today

On the Web

Shiller's CAPE or PER of world stock exchanges

If you know of any website where we can find this information, I would appreciate it if you share it in the comments.