Earning yield is the quotient of
earnings per share
Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company. It is a key measure of corporate profitability and is commonly used to price stocks.
In the United States, the Financial Accounti ...
(E), divided by the
share price
A share price is the price of a single share of a number of saleable equity shares of a company.
In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
B ...
(P), giving E/P. It is the reciprocal of the
P/E ratio.
The earning yield is quoted as a percentage, and therefore allows immediate comparison to prevailing long-term interest rates (e.g. the
Fed model
The "Fed model" or "Fed Stock Valuation Model" (FSVM), is a disputed theory of equity valuation that compares the stock market's forward earnings yield to the nominal yield on long-term government bonds, and that the stock market – as a whole ...
).
Applications
The earning yield can be used to compare the earnings of a
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
, sector, or the whole
market against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free
treasury bonds
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Since 2012, U.S. gov ...
. Some of this may result in dividends, while some may be kept as retained earnings. The market price of stocks may increase or decrease, reflecting the additional risk involved in equity investments. The average
P/E ratio for U.S. stocks from 1900 to 2005 is 14, which equates to an earnings yield of over 7%.
The
Fed model
The "Fed model" or "Fed Stock Valuation Model" (FSVM), is a disputed theory of equity valuation that compares the stock market's forward earnings yield to the nominal yield on long-term government bonds, and that the stock market – as a whole ...
is an example of a system that uses the earnings yield as a method to assess aggregate stock market valuation levels, although it is disputed.
Adjusted versions
Earning yield is one of the factors discussed in
Joel Greenblatt's ''
The Little Book That Beats the Market''. However, Greenblatt uses an adjusted earning yield formula to account for the fact that different companies have different debt levels and tax rates.
Earnings Yield = (Earnings Before Interest & Taxes + Depreciation – CapEx) / Enterprise Value (Market Value + Debt – Cash)
This tells you how expensive a company is in relation to the earnings the company generates. When looking at the Earning Yield, we make certain adjustments to a company’s market capitalization to estimate what it would take to buy the entire company. This involves penalizing companies carrying much debt and rewarding those having much cash.
Euclidean Technologies Review of The Little Book That (Still) Beats the Market
See also
* Dividend yield
The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant ...
* Fed model
The "Fed model" or "Fed Stock Valuation Model" (FSVM), is a disputed theory of equity valuation that compares the stock market's forward earnings yield to the nominal yield on long-term government bonds, and that the stock market – as a whole ...
References
{{DEFAULTSORT:Earnings Yield
Financial ratios
Factor income distribution