PE Calculation vs. Shiller PE/TM PE Calculation

Attribute	PE Calculation	Shiller PE/TM PE Calculation
Definition	Price-to-earnings ratio calculated using current earnings	Price-to-earnings ratio calculated using average earnings over a period of time (Shiller PE) or using trailing twelve months earnings (TM PE)
Use	Provides a snapshot of how much investors are willing to pay for each dollar of earnings	Provides a longer-term perspective on valuation by smoothing out earnings fluctuations
Volatility	More volatile as it is based on current earnings	Less volatile as it is based on average or trailing earnings
Historical data	Only considers current earnings data	Considers historical earnings data to calculate average or trailing earnings

Introduction

When it comes to evaluating the valuation of a company or the overall stock market, investors often rely on various metrics to make informed decisions. Two commonly used metrics are the Price-to-Earnings (PE) ratio and the Shiller PE/TM PE ratio. While both metrics aim to provide insights into the valuation of stocks, they have distinct attributes that set them apart. In this article, we will compare the attributes of PE Calculation and Shiller PE/TM PE Calculation to help investors understand the differences between the two.

PE Calculation

The Price-to-Earnings (PE) ratio is a widely used metric in the financial industry to assess the valuation of a company. The PE ratio is calculated by dividing the current price of a stock by its earnings per share (EPS). This ratio provides investors with a simple way to gauge how much they are paying for each dollar of earnings generated by the company. A low PE ratio may indicate that a stock is undervalued, while a high PE ratio may suggest that a stock is overvalued.

One of the key attributes of PE Calculation is its simplicity and ease of use. Investors can quickly calculate the PE ratio of a stock by obtaining the current price and EPS figures. This makes it a convenient metric for making quick comparisons between different stocks or industries. Additionally, the PE ratio is widely available and commonly reported by financial websites and platforms, making it easily accessible to investors.

However, one limitation of the PE ratio is that it does not take into account the cyclicality of earnings. In times of economic downturns or recessions, earnings may be temporarily depressed, leading to artificially high PE ratios. This can give a misleading picture of a company's valuation and may not accurately reflect its long-term prospects. As a result, some investors prefer to use alternative metrics, such as the Shiller PE/TM PE ratio, to account for these fluctuations.

Shiller PE/TM PE Calculation

The Shiller PE ratio, also known as the cyclically adjusted PE ratio or CAPE ratio, was developed by Nobel laureate Robert Shiller as a way to account for the cyclicality of earnings in the stock market. The Shiller PE ratio is calculated by dividing the current price of a stock by the average of its inflation-adjusted earnings over the past 10 years. This smoothing mechanism helps to provide a more stable and long-term view of a company's valuation.

Another variation of the Shiller PE ratio is the Trailing Twelve Months (TM) PE ratio, which calculates the PE ratio based on the earnings of the past 12 months. While the TM PE ratio is more straightforward than the Shiller PE ratio, it still provides a more comprehensive view of a company's valuation compared to the traditional PE ratio. By using a longer time frame for earnings, the Shiller PE/TM PE ratio can help investors identify potential overvalued or undervalued stocks more accurately.

One of the key attributes of the Shiller PE/TM PE Calculation is its ability to smooth out short-term fluctuations in earnings and provide a more stable measure of valuation. This can be particularly useful for long-term investors who are looking to assess the intrinsic value of a company over an extended period. Additionally, the Shiller PE/TM PE ratio can help investors avoid the pitfalls of relying solely on short-term earnings data, which may not accurately reflect a company's true value.

Conclusion

Both PE Calculation and Shiller PE/TM PE Calculation are valuable metrics that can help investors evaluate the valuation of stocks. While the traditional PE ratio is simple and easy to use, it may not provide a complete picture of a company's valuation, especially during economic downturns. On the other hand, the Shiller PE/TM PE ratio offers a more comprehensive and stable measure of valuation by accounting for the cyclicality of earnings. By understanding the attributes of both metrics, investors can make more informed decisions when assessing the valuation of stocks in their portfolios.