Cyclically adjusted price to earnings

Price divided by the average of inflation-adjusted earnings over a longer window, usually ten years. It exists to stop a cyclical peak or trough from setting the multiple.

A share at ₹1,200 with ten-year average real earnings of ₹9.50 trades at 126.3 times on this basis, against 97.6 on trailing earnings.

The measure works best at index level and over long horizons, where the mean-reversion it assumes has some empirical support. Applied to a single fast-growing company it is close to meaningless, because a ten-year average of a business that has quadrupled is not a normal earnings level.

For an individual cyclical, mid-cycle earnings estimated from capacity and normal margins beats a mechanical average.