The CAPE Ratio Calculator helps investors determine whether a stock or market is overvalued or undervalued by comparing its price to average earnings. The Cyclically Adjusted Price-to-Earnings (CAPE) ratio, also known as the Shiller P/E ratio, is widely used in long-term investment analysis.
Formula
The CAPE ratio is calculated using the formula:
CAPE = P / E
Where:
- CAPE = Cyclically Adjusted Price-to-Earnings Ratio
- P = Market price
- E = Earnings per share (EPS) over a 10-year period, adjusted for inflation
How to Use
- Enter the market price (P) of the stock or index.
- Enter the earnings per share (E) based on a 10-year average.
- Click the "Calculate" button.
- The CAPE ratio will be displayed.
Example
Consider a stock with:
- Market Price (P) = $3,000
- Earnings Per Share (E) = $150
Using the formula:
CAPE = 3,000 / 150
CAPE = 20.00
This means the stock has a CAPE ratio of 20, which can be used to assess valuation.
FAQs
1. What is the CAPE ratio?
The CAPE ratio measures the price of a stock relative to its inflation-adjusted earnings over 10 years.
2. Why is the CAPE ratio important?
It helps investors determine if a stock or market is overvalued or undervalued for long-term investing.
3. How is the CAPE ratio different from the P/E ratio?
The P/E ratio considers current earnings, while the CAPE ratio averages earnings over 10 years to smooth out fluctuations.
4. What is a good CAPE ratio?
A lower CAPE ratio (below 15) suggests undervaluation, while a higher CAPE ratio (above 25) may indicate overvaluation.
5. How does the CAPE ratio affect investment decisions?
Investors use the CAPE ratio to identify potential market bubbles or buying opportunities.
6. What is a normal CAPE ratio for the stock market?
The historical average CAPE ratio for the S&P 500 is around 16 to 18.
7. Can the CAPE ratio predict stock market crashes?
A very high CAPE ratio has historically preceded market downturns, but it is not a perfect predictor.
8. Does the CAPE ratio work for individual stocks?
It is mainly used for broad market indices, but can be applied to individual stocks with sufficient historical data.
9. How does inflation impact the CAPE ratio?
The CAPE ratio adjusts earnings for inflation, making it a more reliable long-term metric.
10. What happens when the CAPE ratio is high?
A high CAPE ratio suggests that stocks may be overpriced, leading to lower future returns.
11. How does the CAPE ratio relate to economic cycles?
The ratio tends to rise in economic booms and fall in recessions.
12. Can the CAPE ratio be used for value investing?
Yes, value investors look for low CAPE ratios as a sign of undervaluation.
13. What are the limitations of the CAPE ratio?
It does not account for interest rates, market sentiment, or short-term earnings changes.
14. Does a low CAPE ratio always mean a stock is a good buy?
Not necessarily, as low ratios may indicate weak growth prospects.
15. How does the CAPE ratio compare across markets?
Different countries and sectors have different historical averages, so comparisons should be made carefully.
16. Can the CAPE ratio be used in mutual funds or ETFs?
Yes, investors analyze the CAPE ratio of index funds and ETFs before investing.
17. How often should the CAPE ratio be checked?
It is a long-term indicator, so checking quarterly or annually is sufficient.
18. What role does monetary policy play in the CAPE ratio?
Low interest rates tend to push CAPE ratios higher, while high rates lower valuations.
19. Is the CAPE ratio useful for short-term trading?
No, it is best for long-term investing rather than short-term speculation.
20. How can investors use the CAPE ratio alongside other metrics?
Pairing it with dividend yield, earnings growth, and interest rate trends provides a fuller investment picture.
Conclusion
The CAPE Ratio Calculator is a valuable tool for long-term investors seeking to evaluate market conditions. By understanding the CAPE ratio, investors can make informed decisions about stock valuations and future market trends.