A standard P/E ratio compares the current share price of a firm to one year’s earnings.
Critics argue that this makes the ratio too sensitive to the changes in a firm’s profits that can occur at different points in a ten-year business cycle. So a CAPE compares the current share price to a profit figure that is an average of the last ten years. Fans argue that this smooths out earnings volatility and makes the resulting P/E ratio more reliable. This measure is also known as the Shiller P/E after the Nobel Prize winning Yale Professor Robert Shiller, who invented it.