How Shiller PE ratio aids in determining relative value of a company's shares? Lets find out!

Mandar Wagh
/ Categories: Knowledge, General
How Shiller PE ratio aids in determining relative value of a company's shares? Lets find out!

Valuation metrics are ratios and models that can help investors estimate how much a company is worth. 

One of the most popular valuation metrics used by investors and analysts to assess the relative value of a company's shares is the price-to-earnings ratio. Making investment decisions can be aided by it. 

The beauty of the PE ratio is that it allows for apples-to-apples comparison by standardising stocks with varying prices and earnings levels. The PE ratio of a company can be compared to its own historical performance or the PE of its sector. The ratio shows whether a stock is currently overvalued or undervalued. A high PE ratio indicates that the stock is overpriced or that investors anticipate rapid future growth. PE ratios come in a variety of forms that are used in real life. PE ratio may be estimated on a trailing (backward-looking), forward (projected), or average basis.  

 

Let's decode ‘Shiller PE Ratio’!  

Robert Shiller, a renowned Yale University professor, coined the term, Shiller PE ratio. The ratio uses ten-year average earnings per share (EPS) adjusted for inflation. This helps to eliminate earnings fluctuations that occur during different stages of a business cycle (such as expansion or recession) while taking the company's long-term financial performance into account. As a result, the ratio is also known as the cyclically adjusted price-to-earnings ratio, i.e. CAPE ratio. Nonetheless, Shiller PE ratio, like TTM PE, is backward-looking and disregards a company's future earning potential.  

Rate this article:
4.3

Leave a comment

Add comment

DSIJ MINDSHARE

Mkt Commentary28-Mar, 2024

Multibaggers28-Mar, 2024

Interviews28-Mar, 2024

Multibaggers28-Mar, 2024

Multibaggers28-Mar, 2024

Knowledge

General26-Mar, 2024

MF25-Mar, 2024

General18-Mar, 2024

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR