Cyclical
Fundamental analysisA business whose earnings swing widely with the economic cycle.
In plain terms
Looks cheapest on PE exactly when it is at the top of its cycle.
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Glossary
Every term is defined twice: once the way a filing would put it, and once the way somebody would explain it to you across a table. The second one is usually the one that sticks.
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Cyclical business
Fundamental analysisA business whose profits rise and fall with an economic or commodity cycle rather than trending steadily.
In plain terms
Looks cheapest at the top and dearest at the bottom, because earnings swing far more than the price does.
Mid-cycle earnings
Fundamental analysisAlso called: Normalised earnings
Profit averaged across a full economic cycle, used to normalise a cyclical company’s valuation.
In plain terms
The only sane denominator for a cyclical. Trailing earnings get the answer wrong at both ends of the cycle, confidently.
Terminal decline
Fundamental analysisA permanent, structural fall in demand for a product or service, as distinct from a cyclical downturn that reverses.
In plain terms
The question is never whether the decline is real but how fast it is and whether it is accelerating, because the rate sits in the denominator of the valuation.
P/E ratio
Fundamental analysisPrice divided by earnings per share — the multiple of annual profit being paid per share.
In plain terms
How many years of current profit you are handing over. Inverts its meaning for cyclicals.
Peak earnings
Fundamental analysisProfit at the top of a cycle, which is not representative of what the business earns across a full one.
In plain terms
This is exactly when a cyclical looks cheapest on P/E, because the denominator is temporarily swollen. Normalised earnings or price-to-book describe it more honestly.
Replacement cost
Fundamental analysisWhat it would cost to build the same assets today.
In plain terms
Why a cyclical trading well below replacement cost is a real observation — and why nobody builds new capacity at the bottom.