How Shiller PE ratio aids in determining relative value of a company's shares? Lets find out!

Valuation metrics are ratios and models that can help investors estimate how much a company is worth. 

One of the most popular valuation metrics used by investors and analysts to assess the relative value of a company's shares is the price-to-earnings ratio. Making investment decisions can be aided by it. 

The beauty of the PE ratio is that it allows for apples-to-apples comparison by standardising stocks with varying prices and earnings levels. The PE ratio of a company can be compared to its own historical performance or the PE of its sector. The ratio shows whether a stock is currently overvalued or undervalued. A high PE ratio indicates that the stock is overpriced or that investors anticipate rapid future growth. PE ratios come in a variety of forms that are used in real life. PE ratio may be estimated on a trailing (backward-looking), forward (projected), or average basis.  

Let's decode ‘Shiller PE Ratio’!  

Robert Shiller, a renowned Yale University professor, coined the term, Shiller PE ratio. The ratio uses ten-year average earnings per share (EPS) adjusted for inflation. This helps to eliminate earnings fluctuations that occur during different stages of a business cycle (such as expansion or recession) while taking the company's long-term financial performance into account. As a result, the ratio is also known as the cyclically adjusted price-to-earnings ratio, i.e. CAPE ratio. Nonetheless, Shiller PE ratio, like TTM PE, is backward-looking and disregards a company's future earning potential.