The Cape Ratio Calculator is a financial tool that helps investors evaluate the relative valuation of a stock or an index. It uses the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, which considers the average earnings of a company over a 10-year period, adjusted for inflation. This metric allows investors to gain insights into whether a stock is overvalued or undervalued relative to its historical performance. By using the CAPE ratio, investors can make more informed decisions regarding their investment strategies and assess the potential risks and rewards associated with a specific stock or index.
Formula of Cape Ratio Calculator
The CAPE (Cyclically Adjusted Price-to-Earnings) ratio is calculated using the following formula:
CAPE Ratio = Current Stock Price / Average Inflation-Adjusted Earnings over 10 Years
where:
- CAPE Ratio is the cyclically adjusted P/E ratio (unitless)
- Current Stock Price is the present price of the stock or index
- Average Inflation-Adjusted Earnings is the mean of the company's or index's earnings over the past 10 years, adjusted for inflation
General Terms Table
The following table provides common terms related to the CAPE ratio and general investment metrics, which can be useful for quick reference without needing to calculate each time.
Term | Definition |
---|---|
Current Stock Price | The latest price at which a stock is traded in the market. |
Average Earnings | The mean earnings of a company over a specified period, in this case, 10 years. |
Inflation Adjustment | The process of adjusting earnings for the effect of inflation to reflect real purchasing power. |
CAPE Ratio | A valuation measure that takes into account the long-term earnings of a company. |
Price-to-Earnings Ratio (P/E) | A ratio that compares a company’s current share price to its earnings per share. |
Overvalued | A term used when a stock's price is deemed higher than its intrinsic value. |
Undervalued | A term used when a stock's price is considered lower than its intrinsic value. |
Example of Cape Ratio Calculator
To illustrate the use of the CAPE ratio calculator, consider a company with the following data:
- Current Stock Price: $100
- Average Inflation-Adjusted Earnings over 10 Years: $50
Using the formula:
CAPE Ratio = Current Stock Price / Average Inflation-Adjusted Earnings
CAPE Ratio = $100 / $50 = 2
This indicates that the CAPE ratio for this company is 2, suggesting that the stock may be overvalued if compared to historical averages. Investors can use this information to assess whether it is a good time to buy or sell the stock.
Most Common FAQs
A good CAPE ratio varies by industry and market conditions. Generally, a CAPE ratio below 20 may indicate that a stock is undervalue, while a ratio above 30 could suggest overvaluation. However, investors should consider historical context and other financial metrics when making decisions.
Investors should use the CAPE ratio periodically, especially when evaluating potential investments or during significant market changes. Regular assessment can help in making informed investment decisions.
While the CAPE ratio is a valuable tool for assessing valuation, it should not be solely rely upon for predicting market downturns. It is best use in conjunction with other financial metrics and market analysis to provide a broader view of market conditions.