What Is Shiller PE Ratio?
The Shiller PE Ratio is a valuation ratio that compares a company’s current share price to its average inflation-adjusted earnings per share over the past 10 years. Because it uses a decade of earnings rather than just the most recent 12 months, it is designed to smooth out temporary booms, recessions and margin swings that can distort a standard PE Ratio.
It is often called PE10, CAPE or the cyclically adjusted price-earnings ratio. The basic idea is simple: instead of asking what investors are paying for one year of earnings, the Shiller PE Ratio asks what they are paying for a normalized earnings base built from a full business cycle.
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That makes the metric especially useful for cyclical businesses, where profits can rise sharply in strong years and fall sharply in weak ones. A traditional PE ratio can look artificially cheap near the top of a cycle, when earnings are temporarily elevated, or artificially expensive near the bottom, when earnings are temporarily depressed. By averaging inflation-adjusted earnings over 10 years, the Shiller PE Ratio tries to reduce that problem.
At GuruFocus, the denominator used in this ratio is called E10. E10 is the average of a company’s inflation-adjusted earnings per share over the last 10 years. The ratio is then calculated by dividing the current share price by E10.
- The Shiller PE Ratio measures valuation using a company’s current share price divided by its 10-year average inflation-adjusted earnings per share.
- It is also known as PE10 or CAPE.
- The metric is designed to smooth earnings across a full business cycle, making it more useful than a standard PE ratio for cyclical companies.
- GuruFocus calculates the denominator as E10, the average of inflation-adjusted EPS over the past 10 years.
- A higher Shiller PE Ratio generally suggests a richer valuation relative to normalized earnings, while a lower ratio may suggest a cheaper valuation.
- The ratio has important limitations: it assumes the past decade is representative, it can be distorted by structural business changes, and it may be less useful for companies with unstable or negative earnings histories.
How Is Shiller PE Ratio Calculated?
The Shiller PE Ratio starts with a company’s current share price and divides it by E10, the average of the company’s inflation-adjusted earnings per share over the last 10 years.
GuruFocus defines E10 as:
To inflation-adjust each period’s earnings, historical EPS is restated into current purchasing-power terms using consumer price index data:
In other words, older earnings are scaled upward to reflect inflation, then the 10-year average is taken. That average becomes the normalized earnings base used in the ratio.
Components of the formula
- Share Price: the company’s current market price per share.
- EPS: diluted earnings per share for each historical period.
- CPI adjustment: used to convert past earnings into current-dollar terms.
- E10: the average of those inflation-adjusted earnings over 10 years.
GuruFocus calculation details
GuruFocus applies the Shiller framework to individual companies, not just to the broad market. Historically, the concept was popularized by Nobel laureate Robert Shiller for evaluating the overall stock market, but the same logic can be extended to single stocks.
GuruFocus also notes an important implementation detail: it uses the CPI data of the country or region where the company is headquartered. If CPI data for that country or region is unavailable, GuruFocus uses U.S. CPI data as the default source.^1
This matters because inflation adjustment is central to the metric. Without it, earnings from 10 years ago would not be directly comparable to earnings today.
Shiller PE Ratio Trend Over Time
A company’s Shiller PE Ratio is often more informative when viewed over time rather than as a single snapshot. A rising ratio may indicate that the stock price is increasing faster than normalized earnings, while a falling ratio may suggest that valuation is becoming more conservative relative to long-term earnings power.
Trend analysis can also help investors distinguish between a temporarily high or low reading and a more persistent re-rating by the market.
What Does Shiller PE Ratio Tell You?
The Shiller PE Ratio tells you how expensive a stock is relative to its normalized, inflation-adjusted earnings history.
A high Shiller PE Ratio generally means investors are paying a high price for each dollar of average real earnings over the past decade. That can imply strong market expectations, a premium-quality business, or simply an expensive stock.
A low Shiller PE Ratio generally means the stock is trading at a lower price relative to its normalized earnings base. That may indicate undervaluation, but it can also reflect weak growth prospects, deteriorating fundamentals or a business facing structural challenges.
This is why the ratio is best used as a starting point rather than a final verdict.
Why investors use it
Investors use the Shiller PE Ratio because it can provide a more stable valuation signal than the standard PE ratio in businesses with cyclical earnings. For example, commodity producers, industrial firms, retailers and other economically sensitive companies can show large year-to-year swings in profitability. A 10-year average helps reduce the noise from those swings.
The ratio can also be useful when comparing a company to:
- its own historical valuation range,
- close industry peers,
- or the broader market.
If a company’s Shiller PE Ratio is far above its own long-term average, investors may conclude the stock is priced for unusually strong future performance. If it is far below its historical range, the market may be discounting weaker future earnings or overreacting to temporary problems.
How it differs from a regular PE ratio
A regular PE ratio usually uses trailing 12-month earnings or forward expected earnings:
The Shiller PE Ratio replaces that one-year earnings figure with a 10-year inflation-adjusted average. That makes it slower-moving and less sensitive to short-term earnings volatility.
For stable businesses, the two ratios may not differ dramatically. For cyclical businesses, the difference can be substantial.
Limitations of Shiller PE Ratio
Like any valuation metric, the Shiller PE Ratio has important limitations.
First, it assumes that the past 10 years of earnings are a reasonable guide to normalized earnings power. That assumption can break down when a company’s business model has changed materially. A firm that has transformed through acquisitions, divestitures, regulation, technology shifts or strategic repositioning may have a 10-year earnings history that no longer reflects its future economics.
Second, the ratio can be less useful for companies with highly erratic or frequently negative earnings. If a business posted losses during part of the 10-year period, E10 may be very low or even negative, which can make the Shiller PE Ratio extremely high, not meaningful or impossible to interpret.
Third, accounting changes and one-time charges can affect reported earnings. Even though averaging over 10 years reduces some noise, it does not eliminate distortions from unusual write-downs, tax events or changes in reporting standards.
Fourth, the metric may understate the value of fast-growing businesses. A company whose earnings power has improved dramatically in recent years may look expensive on a Shiller basis because the denominator still includes weaker earnings from many years ago.
Fifth, cross-industry comparisons should be made carefully. Different industries have different margin structures, cyclicality, capital intensity and growth profiles. A “high” Shiller PE Ratio in one sector may not mean the same thing in another.
For these reasons, the Shiller PE Ratio is usually most useful when combined with:
- standard PE,
- price-to-sales,
- price-to-book,
- free cash flow metrics,
- return on capital measures,
- and peer and historical comparisons.
Real-World Example
A good way to understand the Shiller PE Ratio is to compare a cyclical business with a more stable one.
Consider an oil major such as Exxon Mobil. Oil and gas earnings can swing dramatically with commodity prices. In a year of high oil prices, trailing earnings may surge, making the standard PE ratio look deceptively low. In a weak commodity environment, earnings may collapse, making the same stock look deceptively expensive. A Shiller PE Ratio helps smooth those swings by using a decade of inflation-adjusted earnings instead of one unusually strong or weak year.
Now compare that with a more stable consumer business such as Walmart. Walmart’s earnings are generally less volatile across the cycle than those of an oil producer. As a result, its standard PE and Shiller PE may be closer together, though the Shiller version can still be useful for judging whether the stock is trading above or below its long-term normalized earnings multiple.
This illustrates the main strength of the metric: it is often most helpful when current earnings are not representative of a company’s typical earning power.
FAQs
What is a good Shiller PE Ratio?
- There is no universal cutoff. Lower values generally indicate a cheaper valuation relative to normalized earnings, while higher values indicate a richer valuation. The most useful comparison is usually against the company’s own history, its industry peers and the broader market environment.
What is the difference between Shiller PE Ratio and PE Ratio?
- A standard PE ratio uses one year of earnings, usually trailing 12-month EPS or forward EPS estimates. The Shiller PE Ratio uses the average of 10 years of inflation-adjusted earnings, which makes it less sensitive to short-term profit swings.
What is the difference between Shiller PE Ratio and CAPE?
- In most contexts, they are the same thing. CAPE stands for cyclically adjusted price-earnings ratio, which is another name for the Shiller PE Ratio.
What is the difference between Shiller PE Ratio and price-to-sales?
- The Shiller PE Ratio is based on earnings, while price-to-sales is based on revenue. Price-to-sales can be useful when earnings are weak or distorted, but it ignores profitability. The Shiller PE Ratio incorporates profitability, though it can become less useful when earnings are negative or highly unstable.
Can Shiller PE Ratio be negative?
- If E10 is negative, the ratio becomes negative, but that result is usually not very meaningful for valuation. In practice, a negative or near-zero E10 often signals that the company’s earnings history has been too weak or volatile for the metric to be useful.
How should investors use Shiller PE Ratio?
- Investors should use it as one valuation tool among several. It is especially helpful for cyclical companies and for judging valuation relative to normalized earnings. It works best when paired with historical context, peer comparisons and other profitability and cash flow measures.
- PE Ratio - A stock's price divided by its earnings per share, the most widely used valuation multiple for comparing a stock's cost relative to its profits.
- PB Ratio - A stock's price divided by its book value per share, measuring how much investors are paying for each dollar of net assets.
- PS Ratio - A stock's price divided by its revenue per share, useful for valuing companies with low or negative earnings.
- Price-to-Free-Cash-Flow - A stock's price divided by free cash flow per share, a popular alternative to the PE ratio that focuses on real cash generation.
- ROE % - Net income divided by shareholders' equity, measuring how efficiently a company generates profit from the money shareholders have invested.
- ROIC % - Net operating profit after tax divided by invested capital, measuring how effectively a company deploys its capital to generate returns.
Summary
The Shiller PE Ratio is a useful valuation metric because it replaces one year of earnings with a 10-year average of inflation-adjusted earnings. That makes it a more stable measure of valuation, especially for companies whose profits move sharply with the business cycle.
Its main advantage is that it can reduce the distortions that make ordinary PE ratios unreliable at cyclical peaks and troughs. Its main weakness is that it assumes the past decade is still relevant. If a company’s economics have changed materially, the ratio can mislead.
For that reason, the Shiller PE Ratio is best viewed as a normalized valuation lens rather than a standalone buy-or-sell signal. Used alongside other valuation and quality measures, it can help investors make more informed judgments about what a stock is really worth.
Sources
- Robert J. Shiller, “Online Data - Robert Shiller,” Yale University, https://shillerdata.com/
- Investopedia, “Cyclically Adjusted Price-to-Earnings (CAPE) Ratio: Definition and Formula,” https://www.investopedia.com/terms/c/cape-ratio.asp
- Encyclopaedia Britannica, “CAPE Ratio,” https://www.britannica.com/money/cape-ratio
- U.S. Bureau of Labor Statistics, “Consumer Price Index,” https://www.bls.gov/cpi/
- GuruFocus, Exxon Mobil summary page, https://www.gurufocus.com/stock/XOM/summary
- GuruFocus, Walmart summary page, https://www.gurufocus.com/stock/WMT/summary