Understanding the Shiller P/E Ratio: A More Accurate Measure of Stock Value?

Shiller P/E ratio is a measure of the price-to-earnings ratio (P/E) that takes into account the company's historical earnings and future expected earnings growth. It was developed by Robert Shiller, an American economist and Nobel laureate. The Shiller P/E ratio is calculated as follows:

Shiller P/E = (Current Stock Price / 10-Year Average Earnings) x (4-Quarter Moving Average of Earnings / Current Earnings)

The formula takes into account the company's current stock price, its historical earnings over a 10-year period, and its recent earnings growth. The first part of the formula, (Current Stock Price / 10-Year Average Earnings), is the traditional P/E ratio. The second part of the formula, (4-Quarter Moving Average of Earnings / Current Earnings), adjusts for recent earnings growth by comparing the company's current earnings to a moving average of its earnings over the past four quarters.

The Shiller P/E ratio is considered a more accurate measure of a stock's value than the traditional P/E ratio because it takes into account the company's historical earnings and future expected earnings growth, rather than just its current earnings. It is also considered a more stable measure than the traditional P/E ratio, as it is less susceptible to fluctuations in the company's current earnings.

For example, if a company has a current stock price of $100 and a 10-year average earnings of $50, its Shiller P/E ratio would be:

Shiller P/E = ($100 / $50) x (($60 + $70 + $80 + $90) / $100) = 20

This means that the company's stock is trading at a price-to-earnings ratio of 20, based on its historical earnings and future expected earnings growth.