Lesson 6 of 7
The cycle inside a multiple
A trailing P/E of 7.31 against a ten-year inflation-adjusted 39.17 is the same company priced on one good year. The trap works in both directions.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A multiple divides by one year. For a cyclical company that year is the least representative number in the filing.
- Comparing a trailing multiple with the same price over ten inflation-adjusted years separates a cheap price from a peak denominator.
- The trap runs both ways: a very high multiple on a trough year can describe a company whose ten-year record is ordinary.
The arithmetic of a low multiple is a small price or a large denominator, and the two look identical in a screen. The ten-year version of the same ratio tells you which one you have.
Trailing P/E against price over ten inflation-adjusted years
- SM Energy, trailing7.31x
- SM Energy, ten-year39.17x
- CNX Resources, trailing7.90x
- CNX Resources, ten-year34.38x
- Gulfport Energy, trailing8.09x
- Gulfport Energy, ten-year34.06x
What the ten-year version is doing
The long-run ratio is the same price divided by the average earnings per share of the last ten filed fiscal years, with every year restated into today's money using published consumer prices, and with loss years included at their filed value rather than dropped.
That last clause is what makes it work on a cyclical. Averaging only the profitable years turns a business that loses money in every downturn into a steady earner, which is precisely the company the measure exists to catch.
Reading the gap
A trailing multiple near 8 against a ten-year figure near 35 is not a contradiction. It says the latest filed year earned roughly four times the decade's average, and the price is being set on the recent number.
That is a question, not a verdict. Two answers are available and the filings separate them. Either the business has changed, in which case the last few years should show it in volumes, unit costs or contract terms rather than only in price. Or the commodity moved, in which case the ten-year average is the better estimate of the middle of the cycle and the trailing multiple is measuring a good year.
And the same trap upside down
A multiple in the hundreds usually means the denominator has collapsed rather than that the price has run. The ten-year figure says what the same price looks like against a decade of earnings, and in each of these three it is an ordinary number. Whether the collapse is temporary is a question for the filings, not for the ratio.
When the ten-year ratio refuses
It is withheld rather than estimated in three cases, and each refusal is information.
Fewer than five profitable years of restated history on file, so an average would be built on too little. A company reporting in a currency other than the dollar, because US consumer prices do not measure inflation in that currency and mixing the two would not be a measurement. And a decade whose real earnings average to a loss, which is not a multiple at all and reads n/m.
Check yourself
A company's trailing P/E is 7.31 and its price over ten inflation-adjusted years is 39.17. What does that say?
- The company is cheap on both measures
- The latest filed year earned far more than the decade's average, and the low ratio is coming from the denominator
- The ten-year figure is wrong because it includes old data
Show the answer
Answer: B.
Same price, two denominators. The gap locates the cheapness in the earnings year rather than in the price.Why does the ten-year measure include loss-making years at their filed value?
- To make the ratio look worse
- Because averaging only profitable years turns a cyclical into a steady earner, which is the error it exists to prevent
- Because accounting standards require it
Show the answer
Answer: B.
A business that loses money in every downturn is not described by its good years alone, and the measure is built for exactly that company.A trailing multiple in the hundreds usually means what?
- The price has run far ahead of the business
- The denominator has collapsed, and the long-run ratio is the check on whether that is temporary
- The company has no earnings at all
Show the answer
Answer: B.
A near-zero denominator produces an enormous ratio. Reading the same price against a decade of earnings shows whether the price is extreme or only the year is.Sources
- Shiller's cyclically adjusted price to earnings ratio: price over the average of ten years of inflation-adjusted earnings, every year included.
- The product's stored ratios for the named companies, computed on prices last stored 2026-09-15 and on annual statements as filed.
- Damodaran, Investment Valuation: normalising earnings for a cyclical company before any multiple is applied.
What this leaves out
- Both ratios move with the price, which is a stored close rather than a live quote, and with each new annual filing.
- The ten-year measure restates earnings with US consumer prices, so it is withheld entirely for a company reporting in another currency.
- Naming a company here is a statement about two published ratios on one date and nothing more.
- Nothing here is advice about any security.