DEFINITION of 'P/E 10 Ratio'
A valuation measure, generally applied to broad equity indices, that uses real pershare earnings over a 10year period. The P/E 10 ratio uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle. The ratio was popularized by Yale University professor Robert Shiller, who won the Nobel Prize in Economic Sciences in 2013. It attracted a great deal of attention after Shiller warned that the frenetic U.S. stock market rally of the late1990s would turn out to be a bubble. The P/E 10 ratio is also known as the "cyclically adjusted PE (CAPE) ratio" or "Shiller PE ratio."
BREAKING DOWN 'P/E 10 Ratio'
The P/E 10 ratio is based on the work of renowned investors Benjamin Graham and David Dodd in their legendary 1934 investment tome “Security Analysis.” Graham and Dodd recommended using a multiyear average of earnings per share (EPS) – such as 5, 7 or 10 years – when computing P/E ratios to control for cyclical effects.
The P/E 10 ratio is calculated as follows – take the annual EPS of an equity index such as the S&P 500 for the past 10 years. Adjust these earnings for inflation using the CPI. Take the average of these real EPS figures over the 10year period. Divide the current level of the S&P 500 by the 10year average EPS number to get the P/E 10 ratio or CAPE ratio.
The P/E 10 ratio varies a great deal over time. According to data first presented in Shiller’s bestseller “Irrational Exuberance” (which was released in March 2000, coinciding with the top of the dotcom boom), updated to cover the period 1881 to November 2013, the ratio has varied from a low of 4.78 in December 1920 to a peak of 44.20 in December 1999.
A criticism of the P/E 10 ratio is that it is not always accurate in signaling market tops or bottoms. For example, an article in the September 2011 issue of the "American Association of Individual Investors’ Journal" noted that the CAPE ratio for the S&P 500 was 23.35 in July 2011. Comparing this ratio to the longterm CAPE average of 16.41 would suggest that the index was more than 40% overvalued at that point. The article suggested that the CAPE ratio provided an overly bearish view of the market, since conventional valuation measures like the P/E showed the S&P 500 trading at a multiple of 16.17 (based on reported earnings) or 14.84 (based on operating earnings). Although the S&P 500 did plunge 16% during a onemonth span from midJuly to midAugust 2011, the index subsequently rose more than 35% from July 2011 to new highs by November 2013.

Profit Margin
A category of ratios measuring profitability calculated as net ... 
PriceEarnings Ratio  P/E Ratio
The PricetoEarnings Ratio or P/E ratio is a ratio for valuing ... 
Earnings Per Share  EPS
The portion of a company's profit allocated to each outstanding ... 
Accounting Ratio
A way of expressing the relationship between one accounting result ... 
P/E 30 Ratio
The pricetoearnings (P/E) ratio is the valuation ratio of a ... 
Multiple
A term that measures some aspect of a company's financial wellbeing, ...

Markets
A Look At Corporate Profit Margins
Take a deeper look at a company's profitability with the help of profit margin ratios. 
Investing Basics
The Intelligent Investor: Benjamin Graham
Learn about the man who mentored Warren Buffett, who eventually became the investing "Oracle of Omaha". 
Investing Basics
Understanding The CaseShiller Housing Index
This index is a widelyused and respected barometer of the U.S. housing market and the broader economy. 
Economics
Why The Consumer Price Index Is Controversial
Find out why economists are torn about how to calculate inflation. 
Economics
5 Nobel PrizeWinning Economic Theories You Should Know About
Here are 5 prizewinning economic theories that you’ll want to be familiar with. 
Options & Futures
The Consumer Price Index: A Friend To Investors
As a measure of inflation, this index can help you make key financial decisions. 
Markets
Operating Cash Flow: Better Than Net Income?
Differences between accrual accounting and cash flows show why net income is easier to manipulate. 
Trading Strategies
10 Tips For The Successful LongTerm Investor
These guiding principles will help you avoid common folly during the decisionmaking process. 
Budgeting
The P/E Ratio: A Good MarketTiming Indicator
Check out the returns this newer technical analysis tool would've yielded over the period from 1920 to 2003. 
Markets
Understanding The P/E Ratio
Learn what the price/earnings ratio really means and how you should use it to value companies.

What is the formula for calculating compound annual growth rate (CAGR) in Excel?
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >> 
When does the fixed charge coverage ratio suggest that a company should stop borrowing ...
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >> 
What is the difference between the return on total assets and an interest rate?
Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >> 
How can EV/EBITDA be used in conjunction with the P/E ratio?
Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to ... Read Full Answer >> 
How can a company reduce the unsystematic risk of its own security issues?
Companies can reduce the unsystematic risk of their own security issues simply by doing the most effective job possible of ... Read Full Answer >> 
How can I find net margin by looking a company's financial statements?
In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>