Earnings yield

Earnings yield

Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio—the E/P or the EPS.

The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates.

Applications

The earnings yield can be used to compare the earnings of a stock, sector or the whole market against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds reflecting the additional risk involved in equity investments. The average P/E ratio for U.S. stocks from 1900 to 2005 is 14,fact|date=October 2007 which equates to an earnings yield of over 7%.

The earnings yield is also the cost to a publicly traded company of raising expansion capital through the issuance of stock.

Other uses

Earnings yield is one of the factors discussed in Joel Greenblatt's "The Little Book That Beats the Market". However, Greenblatt uses an adjusted earnings yield formula to account for the fact that different companies have different debt levels and tax rates.


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