What is P/E 10 Ratio?

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The P/E 10 ratio is a valuation measure generally applied to broad equity indices that use real per-share earnings over 10 years. The P/E 10 ratio also uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle. The P/E 10 ratio is also known as the cyclically adjusted price-to-earnings (CAPE) ratio or the Shiller PE ratio.

Definition

The Price-to-Earnings Ratio 10 is a valuation metric typically applied to composite stock indices, using the actual earnings per share over the past 10 years. It smooths actual earnings to eliminate fluctuations in net income caused by profit margin changes during typical business cycles. The P/E 10 is also known as the Cyclically Adjusted Price-to-Earnings (CAPE) ratio or Shiller P/E.

Origin

The concept of P/E 10 was introduced by economist Robert Shiller, who developed this metric while studying market valuations and long-term investment returns. The origin of the Shiller P/E can be traced back to the late 1980s and early 1990s when Shiller collaborated with John Campbell to research long-term stock market returns.

Categories and Features

P/E 10 is primarily used to assess the overall valuation level of the market rather than individual stocks. Its feature is the use of a 10-year average of earnings to reduce the impact of short-term earnings volatility, providing a more stable valuation benchmark. The advantage of P/E 10 is its long-term perspective, helping investors identify overvalued or undervalued market conditions. However, its disadvantage is that it may not reflect rapid market changes promptly.

Case Studies

A typical case is during the 2000 dot-com bubble when the P/E 10 reached historical highs, indicating market overvaluation. The subsequent market crash validated the warning sign of the P/E 10. Another case is after the 2008 financial crisis, where the P/E 10 showed the market was undervalued, and the market gradually recovered, offering good investment opportunities.

Common Issues

Common issues investors face when using P/E 10 include how to deal with changes in P/E 10 under different market conditions. The P/E 10 does not always accurately predict market trends as it is a long-term indicator and may not reflect short-term market fluctuations. Additionally, investors might misunderstand the high or low levels of P/E 10, requiring a comprehensive analysis with other indicators.

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Lisbon Treaty

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Labor Intensive

The term "labor-intensive" refers to a process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods or services: the higher the proportion of labor costs required, the more labor-intensive the business.

Labor Intensive

The term "labor-intensive" refers to a process or industry that requires a large amount of labor to produce its goods or services. The degree of labor intensity is typically measured in proportion to the amount of capital required to produce the goods or services: the higher the proportion of labor costs required, the more labor-intensive the business.

Fast-Moving Consumer Goods

Fast-moving consumer goods (FMCGs) are products that sell quickly at relatively low cost. FMCGs have a short shelf life because of high consumer demand (e.g., soft drinks and confections) or because they are perishable (e.g., meat, dairy products, and baked goods).They are bought often, consumed rapidly, priced low, and sold in large quantities. They also have a high turnover on store shelves. The largest FMCG companies by revenue are among the best known, such as Nestle SA. (NSRGY) ($99.32 billion in 2023 earnings) and PepsiCo Inc. (PEP) ($91.47 billion). From the 1980s up to the early 2010s, the FMCG sector was a paradigm of stable and impressive growth; annual revenue was consistently around 9% in the first decade of this century, with returns on invested capital (ROIC) at 22%.

Fast-Moving Consumer Goods

Fast-moving consumer goods (FMCGs) are products that sell quickly at relatively low cost. FMCGs have a short shelf life because of high consumer demand (e.g., soft drinks and confections) or because they are perishable (e.g., meat, dairy products, and baked goods).They are bought often, consumed rapidly, priced low, and sold in large quantities. They also have a high turnover on store shelves. The largest FMCG companies by revenue are among the best known, such as Nestle SA. (NSRGY) ($99.32 billion in 2023 earnings) and PepsiCo Inc. (PEP) ($91.47 billion). From the 1980s up to the early 2010s, the FMCG sector was a paradigm of stable and impressive growth; annual revenue was consistently around 9% in the first decade of this century, with returns on invested capital (ROIC) at 22%.

Negotiable Instruments

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Negotiable Instruments

A negotiable instrument is a signed document that promises a payment to a specified person or assignee. In other words, it is a formalized type of IOU: A transferable, signed document that promises to pay the bearer a sum of money at a future date or on-demand.Common examples of negotiable instruments include personal checks, cashier's checks, money orders, certificates of deposit (CDs), promissory notes, and traveler's checks. The person receiving the payment, known as the payee, must be named or otherwise indicated on the instrument. Because they are transferable and assignable, some negotiable instruments may trade on a secondary market.

Renewable Resource

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Renewable Resource

A renewable resource is a resource that can be replenished naturally over time. As a result, it is sustainable despite its consumption by humankind.Renewable resources for the production of energy are considered especially important for their potential to replace non-renewable, or finite, resources. Additionally, renewable resources can offer cleaner energy solutions than those provided by non-renewable resources such as coal and fossil fuels.Examples of renewable resources include the sun, wind, water, the earth's heat (geothermal), and biomass.

Feasibility Study

A feasibility study is a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the likelihood of it succeeding.Success in business may be defined primarily by return on investment, meaning that the project will generate enough profit to justify the investment. However, many other important factors may be identified on the plus or minus side, such as community reaction and environmental impact.Although feasibility studies can help project managers determine the risk and return of pursuing a plan of action, several steps should be considered before moving forward.

Feasibility Study

A feasibility study is a detailed analysis that considers all of the critical aspects of a proposed project in order to determine the likelihood of it succeeding.Success in business may be defined primarily by return on investment, meaning that the project will generate enough profit to justify the investment. However, many other important factors may be identified on the plus or minus side, such as community reaction and environmental impact.Although feasibility studies can help project managers determine the risk and return of pursuing a plan of action, several steps should be considered before moving forward.