Price-earnings ratio

An oft-used valuation method for individual shares and for the stockmarket as a whole. It compares the share price with the company’s after-tax profits. This can be based on historic or forecast profits. Robert Shiller of Yale University (a winner of a Nobel prize) has developed a method for valuing the entire market, based on an average of the past ten years’ profits (adjusted for inflation), called the cyclically adjusted price-earnings ratio or CAPE.