Earnings Yield
The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (the inverse of the P/E ratio) shows the percentage of a company's earnings per share. Earnings yield is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem underpriced or overpriced.
Definition: Earnings yield is the ratio of the last 12 months' earnings per share (EPS) to the current share price. It is the inverse of the price-to-earnings (P/E) ratio and shows the percentage of earnings per share. Earnings yield is often used to assess the investment value of a stock.
Origin: The concept of earnings yield originates from the P/E ratio, a key metric used by investors to evaluate the value of a company's stock. Over time, investors found that by calculating the inverse of the P/E ratio, i.e., the earnings yield, they could gain a more intuitive understanding of a company's profitability.
Categories and Characteristics: Earnings yield can be categorized as follows:
- Historical Earnings Yield: Calculated based on the past 12 months' EPS, reflecting the company's past profitability.
- Expected Earnings Yield: Calculated based on the expected EPS for the next 12 months, reflecting the market's expectations of the company's future profitability.
- Simple and Intuitive: Investors can quickly understand a company's profitability through a percentage figure.
- Comparative: It can be compared with the earnings yield of other companies, helping investors make more informed investment decisions.
Specific Cases:
- Case 1: Suppose Company A has an EPS of 5 yuan for the last 12 months and a current share price of 50 yuan. The earnings yield is 5/50=10%. This means that for every 100 yuan invested, Company A can generate 10 yuan in earnings annually.
- Case 2: Company B has an EPS of 2 yuan for the last 12 months and a current share price of 40 yuan. The earnings yield is 2/40=5%. Compared to Company A, Company B has lower profitability.
Common Questions:
- Q: Is a higher earnings yield always better?
A: Not necessarily. While a high earnings yield may indicate strong profitability, it could also mean that the company's stock is undervalued. Investors should consider other metrics for a comprehensive analysis. - Q: How can I use earnings yield for investment decisions?
A: Investors can compare the earnings yield with the market average or with companies in the same industry to determine if a stock is undervalued or overvalued.
